Futures trading is an investment that involves speculating on the future price of an asset. A futures contract is a financial agreement that obligates the buyer to purchase or sell an asset at a predetermined price at a future date.
Most futures contracts are traded on exchanges, standardised by size, quality, and expiration date. The vast majority of futures traded are based on commodities, such as agricultural products, precious metals, and energy.
Futures trading is considered a high-risk investment due to the leverage involved. Leverage is the use of borrowed money to control a more significant sum of assets, which allows for the potential to generate large profits. It also carries with it the potential for equally significant losses.
Spread betting is the most popular futures trading strategy
The most popular futures trading strategy in the UK is spread betting. Spread betting is a type of speculative trading that involves betting on the direction of the price movement of an underlying asset. Spread betting is available on various financial assets, including shares, commodities, indices, and currencies.
How to use the spread betting strategy
Decide on the direction of the price movement
First, you’ll need to decide whether you think the underlying asset price will go up or down. If you think the price will increase, you’ll place a “buy” bet. If you think the price will decrease, you’ll place a “sell” bet.
Choose your stake
Your next step is to choose how much you want to stake on your bet. The amount you can stake will depend on your spread betting provider and your account size.
Place your bet
Once you’ve decided on your stake, you can place your bet with your chosen provider. They will quote you a buy and sell price for the underlying asset, and you’ll need to choose which one you want to bet against.
For example, let’s say you want to bet on the price of gold. Your provider quotes a buy price of £1,300 and a selling price of £1,290. You think the price of gold will go up, so you place a buy bet. If gold rises to £1,305, you will make a profit of £5 for every point that gold increases. However, if gold falls to £1,285, you will lose £5 for every point that gold falls.
Close your position
Once you’ve placed your bet, you can close your position at any time by placing an opposite bet. For example, if you place a buy bet on gold at £1,300 and it rises to £1,305, you can close your position by placing a sell bet at £1,305. Your profit would be the difference between the price you bought gold at (£1,300) and the price you sold it at (£1,305), minus any spread betting costs.
Advantages of spread betting
No commissions or fees
Spread betting is commission-free, which means that there are no transaction costs. It is a significant advantage over other types of trading, such as share dealing, where commissions can eat into profits.
No stamp duty
There is no stamp duty on spread bets in the UK. It is another cost advantage over traditional share dealing, where traders must pay stamp duty on every trade.
Spread betting offers investors the opportunity to trade with leverage. Leverage is the use of borrowed money to control a more significant sum of assets, which allows for the potential to generate large profits. It also carries with it the potential for equally significant losses.
Profits from spread betting are absolved from capital gains tax in the UK. It is a significant advantage for investors who trade frequently and can generate consistent profits.
Risks of spread betting
One of the most significant risks of spread betting is that losses can exceed deposits. Trades are placed with leverage, meaning that a small move in the underlying asset’s price can result in a considerable loss.
Spread betting involves complex financial products, and it can be challenging to understand all the jargon and terminology. This complexity can make it difficult for investors to make informed and well-informed decisions.
Spread betting is suitable for short-term trading only, as the markets are highly volatile and fluctuate rapidly. This volatility can result in considerable losses if trades are not managed carefully.