Diversification is one of the cardinal keys to making consistent investment activities that will yield sustainable profits. Diversification helps you to put your investment eggs in many baskets so that looses or failure from any one sector of the economy don't land you in financial ruin. Smart investors tend to diversify their portfolio to include a mix of stocks, currency, precious metals, and derivatives.
Spread betting is a type of derivative trade that provides investors with exposure to different types of asset classes such as stocks and forex among others. Hence, you should consider adding spread betting trades to your portfolio in order to enjoy the benefits of diversification. This article provides insight into why spread betting is perfect as a second investment vehicle.
Low barrier to entry
The first reason spread betting is a smart investment vehicle for creating a second source of income is its low entry barrier in relation to other types of investment. If you want to invest in real estate for flipping or rental purposes, you'll need to have a five-digit capital at the very least in order to enter the real estate market. Stock trading may not require a minimum five-digit trading capital but your trading profit is usually tied to the value of your trading capital.
However, with spread betting you can gain exposure to the market with a small trading capital. You can always increase your exposure to the market as you make more money and your trading experience deepens.
Use of leverage
The second reason smart investors often include spread betting position in their portfolio is that spread betting provide traders with an opportunity to make leveraged trades. A leveraged trade is simply a trade in which you amplify your exposure in a given trade exponentially beyond the value of the actual capital you put into the trade. Putting $1000 into a 1:10 leverage trade will ideally provide you exposure to $10,000 worth of the trade. In essence, someone with a 1:10 leverage trade of $1000 will book the same profits accruable to a $10,000 trade.
Opportunity to profit in bullish and bearish markets
The third reason spread betting is a smart way to unlock new streams of investment opportunities is that spread betting allows you to profit from both bullish and bearish markets. Stock traders and investors (traditionally) will only make money in a bullish market unless they hedge their portfolio with derivative trades. In essence, a downturn/crash in a stock, sector, or the general economy often triggers losses for investors.
Spread betting investors can however place strategic trades that allow them to record gains irrespective whether the general market is trading up or down. . ETX Capital’s spread betting platform allows traders to diversify their exposure by placing a mix of bullish and bearish trades.
Tax benefits in some markets
Spread betting is a viable source of second income because it offers impressive tax benefits in some markets. In a regular trade involving stocks, ETFs, or bonds you'll be required to pay capital gains taxes on your profits in tandem with your income bracket and tax liabilities. Stock traders and investors are also liable to pay commissions to open or close positions. However, profit from spread betting activities are not taxed the UK and some other countries in the EU.
A word or two on risk management
All forms of trading and investing carry an inherent element of risk; interestingly, holding your wealth as cash also has its own risks. Hence, you'll need to know the risks to expect if you want to take up spread betting as a second source of income or investments. One of the main risks is that spread betting investors must watch are the potential pitfalls in a leveraged trade.
If a leveraged trade goes against you, you can lose all the capital you placed on the trade and the money left in your trading account could also be lost. You can protect account from massive leveraged with standard stop loss orders or guaranteed stop loss orders. The standard stop loss order will automatically close a losing trade at the best available price one the trade breaches the set stop value.