Why Spread Bet? There are many positives but there is also one key negative. Because spread betting is a leveraged product you can end up losing more than you initially invest. Of course because it is a leveraged product you can also win more than you initially invest.

We will discuss the many positives in a moment but with spread betting you should always be aware of the aforementioned downside. You should also be aware of some of the simple ways of reducing the risk.

Two important ways of reducing your downside are Stop Loss Orders and Smaller Stakes.

Stop Loss Orders and Guaranteed Stop Loss Orders allow you to set the limits on how much you want to risk on each individual trade. Spread betting companies like Financial Spreads automatically apply a Stop Loss to all trades without limiting how much you can win.

It is important to note that Stop Losses are not guaranteed. Your order may be filled at a different level. If you want a Guaranteed Stop Loss that will cost a little more (a wider spread). Both types of Order help you limit your risks and give you peace of mind in volatile markets.

Small stakes. Another way of reducing your risk. Of course smaller stakes mean you will win less but they also limit how much you can lose. You can now open a spread betting account with £50 to £100 and trade with small stakes. With a spread betting account from WorldSpreads or FinancialSpreads.com you can trade the FTSE 100 from £1 or 1 Euro per point.

Once you understand how to limit your downside it is worth understanding the many positives that make spread betting so popular.

Firstly, Buying and Selling. This form of trading offers two-way trading ie you can bet on a market to rise as you would with normal share trading. However it also means you can bet on a market to go down.

Secondly, the Wide Range of Markets. Most spread betting companies offer a wide range of markets. So you can trade on all your normal shares but you can also trade:

1) Indices like the FTSE 100, Dow Jones, Dax etc

2) Commodities like Gold and Crude Oil

3) Foreign Exchange markets like Euro / Dollar, Dollar / Yen, Pound / Swiss Franc

4) Shares from other countries like the USA, Japan, Ireland, Germany etc

And then there is Value. No fees. There are no broker fees and no commissions on a standard spread betting account. And if you live in the UK your profits are Tax Free, that means no income tax, no capital gains tax and no stamp duty*.

Let us not forget the more relaxed trading hours. A number of markets are available to trade outside of Normal Market Hours (note that when you spread bet outside market hours the spreads are often wider).

Overall, provided you control your risks, spread betting is a quick, versatile and convenient way of trading. Of course you must get those risks under control.

Note that spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.

* Note that Tax Law may be different if you pay tax in a jurisdiction outside the UK, it can also change.

 



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Soft Commodities

You can spread bet on the future price of Soft Commodities (Softs) like Coffee and Soybeans just like you can spread bet on the future price of Crude Oil, Gold, the FTSE 100 etc. Soft Commodity prices can rapidly increase on the back of high oil prices due to increased transport and energy costs. Prices are also affected by adverse weather conditions and political policies that force farmers to grow certain types of crop. But if you are spread betting on Softs what about the facts?

 

10 Facts for Spread Betting on Soft Commodities

 





One key factor affecting most Softs is the exchange rate. Because soft commodities are normally traded in US Dollars that means Soft futures prices will be affected by the exchange rates. If there are no other particular influences on supply and demand then if the Dollar goes down against the Euro, the commodities price (in Dollars) will go up and vice versa. This is not always guaranteed but it is an important correlation to take into account.





 





Some of the main soft commodities that you can trade with the major spread betting companies are: Cocoa, Coffee, Corn, Lean Hogs, Live Cattle, Oats, Soybean, Soybean Meal, Soybean Oil, Wheat and Sugar. Note Soybean (US) and Soya bean (UK)





 





Commodities are often split into their main types eg Coffee is traded as higher quality Arabica (or Coffee ‘C’) and lower quality Robusta





 





As mentioned above, Softs are generally traded in Dollars, one of the exceptions is Cocoa (London) which is traded in Sterling





 





When spread betting on the future price of Softs the settlement date of your futures trade is normally in 1-3 months. Eg for wheat the settlement months are listed as March, May, July, September and December. The Wheat September market closed on 20 August and the Wheat December market closes on 19 November





 





You can spread bet on all commodities including softs tax free* and commission free with companies like FinancialSpreads.com and IG Index





 





As with all spread bets you trade in units eg with the Wheat (London) market you trade in £ per tonne, Coffee Robusta is $ per tonne.





 

The current spread for Coffee Robusta is $2196 – $2204. That means you can spread bet on Coffee to close lower than $2196 per tonne or higher than $2204 per tonne.

 

If you were betting £2 per dollar and the price of a tonne moves $20 then your profit / loss would alter by (£2 per dollar) x $20 = £40.

 

 





Although the units the commodities are traded in on the exchanges is fixed, when spread betting on commodities you trade in the currency that suits you eg Pounds per unit, Euros per unit or Dollars per unit





 

Eg Coffee Arabica is traded in 0.01cents / lb (pound).

 

Therefore you could bet 5 euros per 0.01 cent that Arabica goes up or down. If the price / lb then moved by 0.15 cents then your profit or loss would alter by 5 Euros per 0.01 cent x 15 = 75 Euros.

 

Likewise you could bet £8 per 0.01 cent that Arabica goes up or down. If the price / lb then moved by 0.20 cents then your profit or loss would alter by £8 per 0.01 cent x 20 = £160.

 

 





If you are still unsure how the mechanism works then companies like FinancialSpreads.com offer free demo accounts with a virtual £10,000. There you can trade Coffee, Corn, Equities, Forex etc on a copy of their trading platform





 





Note that Interest Rate changes can have knock on affects. Of course we all know the past performance of a market does not always predict the future performance. However in 2008 when the USA was lowering Interest Rates that caused weakness in the Dollar. That therefore increased the price of the soft commodities that were priced in USD. The lesson here is simple. Beware of interest rate changes when you are trading commodities





 

Spread bets carry a high level of risk to your money and may not suit all forms of investor. You can lose more than your initial investment so make sure you only speculate with capital that you can afford to lose. Likewise make sure you understand the risks involved and seek independent financial advice where necessary.

 

* Note that tax law can change and can differ if you live outside the UK



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