While this may not always hold true, investors normally do not want to have their trading portfolio structured in such a way that it is entirely long or short. If you do this, you are likely to be impacted heavily by the day-to-day market movements.
“Aside from being able to access stocks and indices from many diverse countries, spread bets also cover forex pairs, commodities, bonds and interest rates. For instance, you can simultaneously trade assets like the Japanese 10 year government bond, thinly traded commodities such as lean hogs and the Singapore Dollar against the Hong Kong Dollar within a single trading platform. One benefit of all this choice of so many assets is that you can put together a diversified range of trading positions to help you spread your risk.”
Irrespective of whether you’re a long-term buy and hold investor, you can utilise spread bets to take advantage of short-term market movements without impacting your long-term investments. This means while your long-term positions are growing over time, you can trade spread bets to take advantage of short to medium-term trades in the stock market. To introduce diversification in their investment portfolios, some people prefer to maintain their share portfolio for capital gains and ongoing dividend income while also maintaining a separate spread betting portfolio for short to medium-term speculative trading. You will likely find that there are long and short market conditions irrespective of the prevailing market conditions.
“It’s complete lunacy to go all in on one stock, especially one with just a single asset, no matter how worthy. Imagine if there was a terrorist attack, a major accident (BP anyone?) or a natural disaster. Then there’s the political instability and the (very) small chance of losing the asset.”
Obviously, in a bearish market there are likely to be more opportunities on the short side than on the long side but it is still more prudent not to focus exclusively in one direction as you can suffer some sharp drawdowns if you are caught too heavily short at the wrong time. Additionally, the fact that spread betting is traded on margin means that with a certain amount of funds you are able to hold multiple positions in different assets which wouldn’t be possible with regular share dealing. For instance if you have an £5,000 account with a traditional broker, this might only allow you to buy 5,000 shares in a company whose shares are valued at £100p. In contrast with spread bets you are able to open two or more separate positions in different companies thus allowing for better diversification.
One quick tip: After years at this I’ve decided that if you think you understand a company you’re invested in then you’re deluded which is why diversification is so important. When I started out I thought I knew better than the “experts” who said spread your risk. Instead I thought you could do better by investing heavily in two or three companies you understood well. However, many times I’ve seen people say they’ve researched a company, only to get stung by something they didn’t know. Unfortunately, if the investment does do well it lulls you into thinking you know what you’re doing. Best assume you don’t understand, then you won’t be so disappointed!
“Probably the hardest single thing in trading is knowing your tolerance levels how much pain can your portfolios endure and still stay profitable, too little tolerance and every market tremor will take you out of a trade; too much tolerance and you risk losing the lot, a devilishly hard area to get right.”