In the current economic environment we are continuing to see volatile financial markets across the world. Investors are having to continually evaluate how they want to trade on these markets to maximise their returns, and increasing numbers of them are choosing to do that using Financial Spread Betting as their tool of choice.

So let's go back to basics and look at the differences and similarities between investing in Financial Spread Bets and the alternative of investing in the underlying security directly. This can be best done using a specific example.

For your average investor with an eye on a particular rising stock, currently trading at 100p, and with perhaps a bank of £4,000 to invest, he has a choice to make. He might, on the one hand, choose to invest his entire bank and purchase 4,000 shares. If his hunch proves right and two weeks later the shares have risen to 125p, he will be able to sell his shares and realise a profit of £1,000, less dealing costs and Stamp Duty. If, over the course of the year, he makes more profit than the annual CGT allowance (2009/10 - £10,100), he will pay tax on the profits, at his highest rate of tax. In the current year that could be as much as 40% of his profit. So that £1,000 could reduce to £600 after tax.

On the other hand our investor may choose to employ Financial Spread Betting for this trade. If he open a 'buy' at 100p, at £100 per point, in two weeks that will have generated a £2,500 profit. And there won't be any commissions or Stamp Duty to pay either. Finally, the profit will be tax free as the proceeds from Financial Spread Betting fall outside the scope of taxation*.

However, in order to get a balanced view of this transaction, we need to consider the scenario where all does not go well. Let us imagine that instead of a rise in price there is a 15p fall in price. In that case the equity owner might decide to get out with his loss which will cost him £600 plus commission and stamp duty. But the loss for the spread better will be significantly more, at £1,500. And the tax implications continue too, so the loss of £600 on equities would be an allowable tax loss for CGT purposes, potentially reducing its impact to £360. But the £1,500 loss on the spread bet would not be allowable.

In summary then, the advantages of Financial Spread Betting are significant and have made this one of the fast growing financial arenas. But remember the potential risks too!

With financial spread betting you bet on margin which means that you benefit from increased leverage. That is, you pay a small initial deposit (margin) and that allows you to take a larger position than you would be able to in say traditional shares trading. Profits can be substantial but so too can losses, that's why it's important you understand the financial market you are betting on, pro-actively manage your risk and always keep a close watch on your open positions. Risk management is always at the core of any successful financial spread betting strategy.

Controlled Risk Stops and Guaranteed Stops

Placing a stop on your bet is very important. For every bet you place simply calculate how much you can afford to lose and place a stop at the exact position in the market where you would exceed that amount. Guaranteed stops do exactly what you would expect them to, so, even if the market is subject to 'slippage' (a sudden, rapid movement) your position will be guaranteed to close out.

Monitor All Positions Closely

Keeping an eye on your open positions is very important too. Financial spread betting is done on margin and that can be an advantage, but remember, if a market quickly moves against you, you might have to increase the amount of your original margin as security. While it's up to you to monitor your margin on all your positions, if you receive notification from your provider that more margin is due, do not ignore them.