About Spread Trading

What is Spread Trading?

Spread Trading provides an opportunity to profit from an increase or decrease in share prices as quoted on the world’s stock markets. Other financial instruments, such as currencies or commodities, may also be traded. It is not necessary to actually buy the shares or other instrument.

How does it work?

To answer this question, it is best to use an example, such as a Spread Trade on the price of a share. You research the share price of a company that you are interested in, e.g. ABSA Bank. You will have an opinion that the share price will either increase or decrease in the future. If you think the price will go up you "buy" the share price. If you think the price will go down you "sell" the share price. If your opinion is correct, you will make a profit, but if your opinion is incorrect, you will make a loss.

How do I calculate my profit or loss?

Shares on the Johannesburg Stock Exchange are quoted in rands and cents. In Spread Trading, each cent is given a value. Let’s assume you decide to give each cent a value of R10. Then, for every cent the share price moves up or down, you make a profit or loss of R10. You may trade on US or UK share prices in the same way.

You could, of course, give each cent a value greater or less than R10. It depends on the level of risk you are prepared to take. The bigger the value given to each cent, the bigger the potential reward and the bigger the risk.

How do I commence trading?

To commence trading, you need to first open an account with Worldspreads. This can be done by telephone or online and only takes a couple of minutes. You then need to deposit funds to this account. You are now ready to commence with your first trade.

Every trade carries a potential profit or loss.

The amount of funds required in your account to place a particular trade is explained on the home page of our website www.worldspreads.com.za under the heading Market Information. Alternatively, our dealers can tell you instantly how much you would need to place each trade.

Clearly, it would be possible to make a profit. Could I make a loss?

Like any investment, losses may be incurred. However, you can take action to minimise these losses.

When recording your trade with Worldspreads, you can state the maximum you are prepared to lose. This is called a "Stop Loss" and your position is automatically cut when you reach the loss limits you have specified.

In addition, a loss-making trade can be terminated at any time, thus limiting any potential losses. You can stop the extent of the loss immediately by a phone call or by placing a 'counter' trade online. This is called "closing your position" and it is instantaneous, no waiting to contact a broker or hoping to find a buyer for your shares.

How does Spread Trading differ from investing in shares?

It differs in many ways and in each case it has major advantages over investing in shares. Here are some of the main advantages: