Online Trading : Stock, Currency, Options

Spread Betting: Right, now lets take a look at spread betting which you will need to master in order to trade online successfully, and play both sides of the market. I do not propose to write a complete introduction to spread betting here, as I am in the process of developing a new site which will cover the topic in a great deal more detail. As with all my sites the information will be free of charge - all you need to do is read it! The reason that spread betting is such a useful tool to have in your toolkit, is for one reason and one reason only - so that you can play both sides of the market by shorting shares easily.

Online Trading : Short Selling

One of the concepts that new online traders often have a problem understanding, is the concept of selling something you do not own, and buying it back at a later stage for a profit. It is possible to sell stocks short in a trading account, but you will need a margin account to do it. The stocks are borrowed by the broker from another client and lent to you without the owners knowledge. You then sell them short. There are various rules which you must be aware of in terms of the 'up tick rule', and not all stocks can be shorted. In addition if you are holding a short position and a dividend becomes payable, you are responsible for paying it! ( well the true owner wants his dividend, and the broker isn't going to pay it )

Spread betting is a risky business, and depending on who you believe, leaves 80% to 90% of punters on the losing side. As you will note we are using betting jargon, as this is more to do with gambling that investing and trading. It is called spread betting for a reason and not spread investing. It is a dangerous tool since it uses leverage to allow you to control large blocks of stock with very little cash in your account. They all work on a highly geared, leveraged account, probably around 1:10, which means in effect that with only £100  in your account you can control £1,000 of shares. As I mentioned on a previous page, firms are constantly being fined by advertising standards for misleading descriptions of the risks involved.

Online Trading : The Spread

Spread betting in principle is very simple. The company quote a spread of two prices for a particular instrument. The spread is in essence a bid and an ask price, in the same way that this is offered in the cash market, with the spread betting company making their profit from the spread. So you call up the trading desk, or look on the web site for Barclays Bank stock. Let's say you are quoted a spread of 604 - 606 and feel that prices are going up. We therefore place a buy order at 606.  Some time late we find that the stock price has indeed increased in value, and we decide to close the trade at a profit. We find the company is now offering a spread of 625 - 627 and we sell at 625 to close. We have therefore made a profit of 625 - 606, or 19 points.

Had the stock price declined, lets say to 589 - 591, then we would have made a loss had we closed out at 589 of 606-589 or 17 points. Now the question of course is how much does a point value represent in pounds. This of course is up to you, and where so many people lose so much money!

Online Trading : The Stake

Now your profit or loss is governed by how much you staked for each point movement. Let suppose you bet  £5 per point. Then had you forecast correctly you would have made : (625-606) x £5 = £95, and had you forecast incorrectly then you would have lost ( 606-589) x £5 = -£85 easy really!! Note that at £5 per 1p movement you are effectively managing a block of 500 Barclays shares since £5 = 500p. You are trading £3,000 of stocks with only a few hundred pounds in your account this is why spread betting is so dangerous if you do not know what you are doing. My advice to all new online traders is to start small and learn slowly. The minimum stakes offered by some companies is often only 1p or 2p for blue chip stocks in a mini account, so you really cannot do a great deal of damage. Whilst many brokers do offer demo accounts, as with forex, I do not advocate them as there is no substitute to trading with real money, no matter how small. So start with a very small stake, the smaller the better, and learn slowly.

Please note also, that as I said earlier you are trading a derivative ( i.e. an instrument that has been derived from the cash item i.e. the stock ). There are therefore no dividends and the derivative has a 'contract life', normally three months. Each instrument will have a different contract period, and whilst they can be rolled over, you will need to understand this before you open a trade so that positions are not closed unexpectedly! With regard to the spread you are quoted, these will vary from company to company, and minute by minute depending on the underlying instrument and the volatility of the market. It will also vary on the length of the contract you ask for - a quarterly contract will have a wider spread than a near term contract. Contracts can be rolled over and you will need to decide well in advance what you want to do at this stage. ( don't wait until the last minute ) Please attend one of the free training seminars run by  these companies, and if yours doesn't have one please go to one that does ( if only for the food ).

Online Trading : Managing Risk

Now, finally, back to managing risk. You will trade in exactly the same way as if this was a cash market trade. All the spread betting companies offer stop loss orders, as well as a guaranteed stop loss ( they guarantee the price ) In a fast moving market you may not get stopped out at the ordinary stop loss price - ( personally I have never bothered using a guaranteed stop as you have to pay extra for this service, but it is up to you ) In addition to risk management you can also apply your money management principles in exactly the the same way as described on the money management page  - so please make sure you do. Trading online is deceptively easy using a spread betting company, and you can trade stocks, options, forex, futures, indices, commodities, and practically anything you can think of - so be careful!

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