Spread betting

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14. Dynamics - upside and downside

Always look closely at the balance between the upside and the downside of any bet. Most investors focus on the profit they might make but don't pay enough attention to the potential losses.

In general, avoid bets where there is a small but safe upside and a large but sizeable downside. It's simply not worth the risk. You could get the bet right ten times, then get it wrong on the eleventh and lose all your accumulated profits.

Sell bets on individual share spreads can fall into this category:

• the upside is limited because the share price cannot go below 0p.
• the downside is unlimited because the share price can rise without limit.

Suppose you place a £5 sell bet on a highly volatile stock at 30p - 35p. If the share collapses completely the most you can make is £150 (30 x £5). But if the share price goes into orbit and the spread advances to 500p - 530p, you could be staring at a £2,500 loss (530 - 30 x £5).

Those considering down/sell bets, should always bear this balance in mind.

Work out the maximum downside of each bet and be sure that you are willing to lose the money. Remember spread betting is about minimizing risk first and maximizing gain second - good spread betters usually think of the half-empty part of the glass before the half full part. Then bet only what you can afford to lose.

1. What is spread betting? 2. A brief history 3. Spreads on individual equities 4. Spreads on an index 5. Performance spreads 6. Other financial spreads 7. Practical advantages - leverage 8. Practical advantages - going short 9. Practical advantages - hedging 10. Practical advantages - volatile markets 11. Practical advantages - tax 12. Dynamics - think short term 13. Dynamics - the size of the spread 14. Dynamics - upside and downside 15. Dynamics - length of bet 16. Strategy - bet only what you can afford 17. Strategy - cutting losses 18. Strategy - stop losses and limited risk bets 19. Strategy - taking profits 20. Strategy - arbitrage 21. Opening an account 22. Placing a bet and managing your account 23. Regulation 24. Some more tips 25. Conclusion

• Financial Spread Betting
• The Beginner's Guide to Financial Spread Betting