In difficult financial times, investors can sometimes be spooked by market crashes. When entire industries or sometimes entire stock exchanges plummet, it can be tempting to cut losses, withdraw funds, and seek better luck elsewhere.
Most often, this means looking for other markets in which to invest. A Forbes outline of popular alternative markets gives you some idea of what this can entail, pointing to everything from real estate, to gold and silver, to peer-to-peer lending. Any of these can on occasion seem safer to an investor than a market in the midst of a crash, or even a prolonged recession.
Aside from these alternative markets though, some will also simply look into new styles of investment. And one of these that we’re discussing in this post is spread betting.
Known as a financial derivative, spread betting refers to a type of investment that is based more on predictions than purchases and sales. In spread betting, an investor puts money on an educated guess as to whether an asset’s value will rise or fall. As with any other sort of betting activity, the investor is then rewarded with earnings if the educated guess winds up being accurate. At no point in the process does the investor actually own an asset, or a quantity of one.
As to why this can be appealing as an alternative method during difficult times, consider the following points:
Avoiding Sudden Losses – Back in March, we covered drastic losses in the New York Stock Exchange, during which the Dow-Jones, S&P, and Nasdaq were closing sessions down several percentage points each. This was reflective of struggles markets all around the world were experiencing, and it represented the sort of crash in which investors can lose vast amounts of money in short time. Holding an asset simply leaves you vulnerable in a sudden and dramatic crash. By contrast, spread betting almost natural limits losses. While investors can certainly lose money by making incorrect predictions, losses are not necessarily worse if an asset plummets significantly, versus just a little bit.
Tax-Free Investment – According to an FXCM article about spread betting, another clear benefit is that this sort of investment involves “no capital gains tax and no stamp duty.” This plain and simply makes spread betting a more affordable form of investment than most alternatives, which can naturally be appealing during difficult financial times.
Profiting on Loss – Another interesting perk of spread betting is that it actually works in both directions. As we stated above, investors bet on whether an asset’s value will rise or fall — which means that a successful bet can be made on an asset losing value. There is, in fact, no difference; correctly betting on a loss can yield as much of a return as correctly betting on a gain. This can make spread betting appealing during market crashes, in that it gives investors a way to profit off of declining values.
Leveraged Trading – Spread betting is not unique in offering leveraged trading, but this is another feature that may appeal to some investors seeking opportunity. In leveraged trading, an investor can put in a certain amount of money and then make deals with several times that amount, and reap the rewards proportionally. Leveraged trading brings risks of more significant losses as well, but bolder traders are sometimes drawn to it for the possibility of major profits based on limited investment.
The Fun Factor – “Fun” is not a legitimate reason to invest. But it’s a simple reality that many people simply like to bet. Even this year in fact, the Financial Times covered marble races as activities that drew betting activity when sports were temporarily halted. It’s a recreational activity that many people seek out specifically, and combining it with real investment can be appealing. Those for whom ordinary investments have become too challenging or even treacherous may be drawn to the “fun factor” of investing in a way that feels more like placing a bet.
In the end, it’s up to individuals to decide if spread betting is right for them. Particularly in tight financial times, these decisions should be made carefully. The points just outlined, however, speak to why some would consider this option in the first place.