Understanding the Types of Financial Spread Bet - dummies

Understanding the Types of Financial Spread Bet

Part of Financial Spread Betting For Dummies Cheat Sheet (UK Edition)

A highlight of financial spread betting is being able to trade in a wide range of market types and geographic locations. Once, dealing in foreign shares could be logistically quite difficult, but the Internet has changed all that by giving traders online access to markets in different locations and in different time zones.

Financial spread betting takes this one step further by allowing you to deal in products from all around the world from a single trading platform – which means you can build trading strategies for just about anything.

Here are the main types of spread bets:

  • Commodity bets: These have been around for some time, but have become more popular in recent years as the commodity boom has brought the world’s attention to this investment category. Commodity bets enable you to trade products like crude oil over a long trading day, which makes these spread bets very convenient. Commodity bets also offer very good portfolio diversification for traders.

  • Foreign exchange (FX, Forex) bets: This is a very popular trading tool offered by most providers. In this market you’re dealing in the relative value of two currencies (the exchange rate). The market is very liquid (meaning it’s very easy to get in and out of trades). Foreign exchange spread bets are available to trade 24 hours a day, often six days a week, so you can trade at any time that appeals to you.

  • Index bets: Index spread bets have become very popular because they allow traders to take exposure to the wider market in a single trade by placing a bet over an index. This may be something like the FTSE 100 Index or the Dow Jones Industrial Average in the United States. Index spread bets are typically available to trade all day and much of the night.

  • Interest rate bets: Interest rate (or money market) spread bets enable traders to access a market that most traders may not have dealt in before – the interest rate securities market, with a particular emphasis on short-term notes and longer-term bonds. While the underlying instruments may have a specific term (for example, ten years), this isn’t an issue for spread betting, where you’re only interested in capturing the price movements. Interest rate bets can offer real benefits to traders in the form of diversification.

  • Share bets: For budding spread bettors share bets are likely to be the first step, because they’re the most similar spread bet to a market you should already be familiar with – the share market. Share bets enable you to trade the price movements of domestic markets and most of the larger foreign markets. Share bets are available to trade during the same hours that the underlying market is open – so if you want to trade US markets, you’re in for a late night.