Spread Betting, which is a cost efficient way to leverage the financial derivatives for speculating on the price movments of the different assets and instruments, such as currency pairs, commodities, stocks and indices is a legal practice in UK There are several companies in UK which offer the traders to place spread bets on these financial assets and earn profits for speculating the right direction of their priceâ€™s movement including ETX Capital.
While there are many entities on which people can place spread bets, but commodities are among the most popular assets. However, many new traders wonder, how the commodity oriented spread betting works.
How Commodity Oriented Spread Betting Works?
With the spread bet, a trader is required to speculate that whether the price of the chosen commodity will increase or decrease in reference to the current price. The trader is required to not only predict the direction in which the price will move, but also the extent to which the price would move.
On the basis of the speculation, the trader either makes a profit or loss. If the direction of movement is speculated right, whether in the positive or negative side, traders will make a profit , but will suffer loss if its wrong. Furthermore, the amount of profit or loss is determined by the degree to which the movement of price is speculated right.
In all this process, the traders never buy or sell the actual commodities. The trade in the commodities is made through a derivative contract which eliminates the need for buying or selling the assets or commodities in reality. The trader who speculates that the price will augment and go up are required to open a long position in the spread bet while the traders who speculate the movement of price in the negative direction is required to open a short position in the spread bet. The long position is associated with buying the commodities and short position is associated with selling them.
The traders indulged in a spread bet buys or sells a pre-decided sum of cash per price point movement of the primary asset. This amount in spread betting is referred to as the stake size. Now, when the underlying asset moves in any direction, for every point of movement the trader gets or loses the multiples of the stake size. Just like the other spread bets, the commodity spread betting is also a leveraged trade. The gains can be easily magnified if the right direction of movement of the underlying assets is speculated, but at the same time, for the wrong direction the losses also get magnified.
Traders can easily trade round the clock and one of the biggest advantages of commodity based spread betting is that one can bet on the directional price movements as an individual trader. Also, the income generated from the spread betting is non-taxable, as spread betting is considered as a variant of the gambling. This might be the reason that spread betting on commodities is illegal in the USA, Australia and many other countries.