An introduction to spread trading

Julie Brownlee, Fsp Invest, 11 Nov. 2015

Tags: spread trading, what is spread trading, how spread trading works, introduction to spread trading, trading,

Spread trading is a way to trade the financial markets.

It appeals to many traders as it’s straightforward to understand and by using gearing, you can multiply your potential gains on the movements of underlying financial assets.

So how does spread trading work?

Let’s take a closer look…

What is spread trading?

Spread trading is a way of trading the financial markets. You can trade shares, indices, commodities and currencies.

You decide how much you want to risk per point (or cent) on the underlying asset. You can trade anything from R1 upwards.

So if you traded R1 a point on a long Sasol trade, every time Sasol’s share price rose 1c, you’d gain R1. Equally so, each time Sasol’s share price fell 1c, you’d lose R1.

The more you risk per point, the higher your potential gains or losses are.

There are no commissions to pay with spread trading. This is because the company you trade through makes their money from the spread. This is the difference between the buying price and the selling price of the asset you trade.

Using spread trading platforms, you can set take profit and stop loss levels. If your trade hits either of those levels, your trade will be closed out.

The risks of spread trading

Like other forms of trading, you trade on margin. This means you only have to put down a small percentage, say 10%, of your overall exposure.

If you’re new to spread trading, you need to understand the risks that come with trading on margin. As it’s a geared instrument, you can lose a lot of money if you risk too much and a trade doesn’t work out as you planned.

You should find that you can access a demo spread trading account with your trading company. These are great to use when you start out as you can try spread trading without risking any of your money.

So there you have it. An introduction to spread trading.

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