We are currently living in worrying times economically. The country is perched on the brink of recession and inflation is rising much faster than salaries are. While there are a few bright spots, such as the ongoing revitalisation of many local high streets, there are still plenty of reasons to be concerned. In times like these, many people look for additional ways to bring in money.
Some start second jobs with companies such as Uber or Deliveroo, while others find ways to monetise a hobby or skill — the “side hustle” that everyone talks about. Some turn to investing or trading. The problem with traditional stock investing is that it generally requires a large financial investment at the beginning. In times like these it can be difficult, if not impossible, to pull together enough money to invest at a substantial level.
There are also the taxes to consider. If you are investing or trading stocks in the traditional manner, you will be taxed on any earnings you make.
An alternative way of speculating on the stock market is spread betting. Not only does spread betting require a smaller initial outlay, it also does not require you to pay taxes on any profits you might make. Just like regular trading, there is always a high risk that you will lose money instead of making it. The use of a demo account can help you get a feel for spread betting and a better understanding of the risks involved.
Many of the top brokers that you can open a spread betting account with also allow you to open a demo account. This article will explain how spread betting works and then explain the value of opening a demo account before you start trading for real.
What is financial spread betting?
In traditional trading, you purchase a stock in a company and if the stock rises, then you make money when selling it, and if it falls, you lose money if you are still holding it. With spread betting, you have the potential to make money either if the market goes up or if the market goes down but it only depends on how you’ve placed your trade.
The way it works is the broker offers you two prices for the asset that you’ve decided to bet on, a bid price and an ask price. If you think the stock is going to go up, you pay the bid price which is slightly higher than the actual price of the stock. If you think it will go down, you deal at the ask price which is slightly lower than the actual price.
Since you aren’t actually buying any assets, you invest on a margin. This is a percentage of the value of the asset and is set by the broker. Betting on the margin essentially magnifies your wins as well as your losses. This type of investment or bet is known as leverage because even though you only put in a small percentage it still corresponds to a much larger investment amount.
Benefits of opening a demo account
Since spread betting is quite fast paced and does require a good knowledge of the market, it can be very difficult for beginners to do well. Since you’re working with margins and points instead of just the straight numbers of a traditional stock investment, it can also be quite confusing. A small margin investment with a high percentage can quickly turn into a big win or a huge loss that you could struggle to cover.
There are risks associated with spread betting. Due to how leverage works, you can still lose significant amounts of money if you don’t have risk management tools in place or manage to close the bet in time. There is also the fact that if you are betting on international markets and something happens in another time zone, you may not be awake to prevent the damage from being done.
A demo account allows you to practice spread betting without having to risk any of your own money. It also allows you to get a feel for the broker’s app and the software that they use. This allows you to become comfortable with both the concept of spread betting and with the tools you’ll be using.
When you open a demo account with a regulated broker, they will typically also provide you with access to their supplemental materials. These include things like charts, watchlists, insights from top analysts and much more. That way you can learn about spread betting while getting hands-on experience to create a more holistic learning experience and eventually you could be able to join the stock market traders community.
