There are benefits and risks of Spread Betting leverage, let’s take a look at them to see what they are. Leverage is a key benefit of spread trading, so it is important you have a solid grasp over what it is and how the mechanism works. In this article we are going to talk about why leverage can be both a good and bad thing in financial spread betting.
Advantages of Spread Betting Leverage
First of all, the huge advantage of leverage is that it gives you drastically improved rates of return. The main benefit is that returns are paid on multiples of your original bet in what is known as the “betting angle.” Thus you are able to earn far more money from the same transactions than traditional investors, simply because you are able to make your money work more efficiently.
This advantage comes at no additional cost or effort but does come with additional risk. We’ll discuss this shortly.
The improved rates of return mean that the spread trader doesn’t have to put up nearly as much as their traditional investor counterparts. We’re talking multitudes less, typically around 5-10% which is utterly fantastic – less is more when it comes to finance.
This boils down to a speedy return due to the high leveraging. You don’t need to stay in a trade for weeks, months, or years to see a sizeable return. How magnificent is that?
Those are the advantages of spread betting leverage. You need less money to do more, faster. Now the counterpart.
Spread Betting Leverage and Risk
Leverage can be dangerous because if things turn south they will turn south quickly. The very same principles that make you so much money so quickly, can also make you lose money just as fast. While leverage can be your best friend it can also be your worst enemy.
Leverage attracts many to spread betting but can also lead to a speedy departure which is why so many of our tutorials stress the importance of risk management. You really don’t want to end up owing a trading company thousands of pounds and luckily enough, as long as you’re careful, you are unlikely to have that happen.
If you are operating a financial spread betting account with a relatively low amount of money it is best to keep your bets small, no more than £1 a point. This reduces your exposure to risk and keeps your account relatively safe.
Leverage is Both Good and Bad
Let’s do a quick recap: Leverage is both good and bad. The same mechanism that can quickly help you stack up much larger capital gains can also make you lose them. Like traditional investing a mistake can cost you big but the additional leverage on profits also means leveraged losses when it goes wrong, so it’s important that you always do a risk analysis to prevent this from happening. There is nothing worse than working hard to make gains only to lose them all on a silly mistake, so be careful!
Offsetting the Leverage
The increased leverage does not mean that you have to increase your risk of course. We can simply reverse the equation to achieve the same level of returns with a substantially reduced outlay. The increased leverage can be offset quite simply by reducing the size of your trades to a level that suits your individual tolerance level of risk.
In light of what you’ve read so far you have a decision to make:
If the thought of leverage, of making wins bigger and faster than traditional investors who buy stock excites you than financial spread betting is going to be great for you.
On the other hand, if you’re nothing but terrified and don’t find this the least bit exciting then spread betting is only suitable if you have the discipline to limit your losses and keep trades small.
That’s okay. Risk neutrality is a term used in finance to describe how akin to risk an individual is. Spread betting is more risky (though with stop loss orders it does become drastically less so) than traditional investing because of leverage but, on the plus side, it does offer trader a very achievable opportunity to substantially increase their returns.