Unlike traditional investing, spread betting enables you to make geared trades.  When you spread bet on shares you can invest up to ten times the amount of money you have in your spread betting account.  For indexes such as the FTSE 100 the exposure is even greater, up to 20 times the money you have in your spread betting account.  As a result any gain you make on a single trade is magnified.  If you have £100 in your spread betting account and buy the equivalent of £1000 of shares and the shares go up by 10%, you've made £100.  An increase of 10% in the underlying stock translates into an actual return of 100% or ten times greater. 

The gearing effect works in both ways and carries a high degree of risk.  The market could move against you in which case you could lose in excess of your trading capital.  For this reason it is preferable not to bet too much on a single trade and to have a mixture of trades both long and short in your portfolio.

Active v Passive Money Management

The actual return investors make depends on four things:

- The level of gearing - the higher the better but it carries more risk.

- The average return per trade - the higher the better.

- The holding period - this is the average time between opening and closing a trade.  The lower the better.

- The number of trades - the more the better.

A high return can be achieved by having a reasonable level of gearing (not too high but not too low), a positive return per trade, a low holding period and an active strategy (doing a minimum number of trades every month).  

While good timing is vital, an active money management strategy is as important.  This makes all the difference.  As a guide, funds adopting a passive money management strategy such as pension funds (they buy and hold shares for the long term) tend to achieve poor returns.  On the other hand, an active money management strategy coupled with gearing and good timing will produce exceptional returns.

Small is beautiful

Spread betting gives us gearing power for maximum returns.  There is no need to sit on a stock for months for 10% or 20% gains.   Spread betting allows you to make big returns by accumulating quick gains of 5%-6% in a few days or weeks.  Remember, because of the gearing effect, these gains become 40%, 50% or 60% all TAX FREE* within days!

For example a tiny 1% gain in two weeks is equivalent to 1100% per annum (assuming 10 x gearing).   This means that if you did a trade every two weeks and made 1% per trade, your capital would grow by an incredible 1100% over a year.  It is like turning £1,000 into £12,000 in a twelve-month period.  That's the beauty of spread betting.

We have designed a trading guide for spread betting which is available when you subscribe to the FTSE Short Term Forecast.  It tells you what to do in order to become a better spread trader.

To open a spread betting account, click Open an account

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