Today, you can take a punt on the value of the stock market, without buying any shares. The rewards can be tremendous.
 
But financial spread betting is a high-risk venture too. Here's how to approach it...

1. The Gamble
You bet on the JSE rising or falling. You stake a certain amount of money on each point of the index. So the more right you are, the more you win.

It's not just the JSE index you can bet on though. You can also bet on the movement of individual shares, the price of gold, oil, currencies, metals and interest rates.
 
2. The Spread
Brokers quote a "spread" around the current value. So if the JSE is at, say 4200, the bookies may quote 4180-4220. If you think the JSE will rise
from 4200, you have to "buy" the spread at 4220. If you think it will fall, you "sell" at 4180. As you can see, the broker has already set the odds against you.

3. The Contract
Each contract is for one 3 month period of the year. It is titled with the month when it will end Mar, Jun, Sept and Dec. You can "close
out" your contracts at any time in between though.

Your winnings (or losses) are determined by the amount of your stake multiplied by the difference between your bet and the price you close out at.

4. Closing Out
Imagine you bought at 4220 (when the real JSE stood at 4200), and you want to get out when the index hits 4300. The brokers will now quote a spread of, say 4280-4320. To get out, you "sell" this new spread at 4280.
 
The difference between your "buy" and "sell" bets is 4280 x 4220 = 60. If you bet R10 per point, you've made R600.

5. The Catch
Note that whilst the JSE actually rose 100 points, you can only claim winnings on 60 points. As we saw earlier, the brokers set the spread to limit your winnings.

6. The Risk
Imagine your "buy" bet goes wrong, and the JSE falls 100 points to 4100. Then brokers now quote 4080-4120. You have to "sell" at the lower price to close out - meaning a difference of 4220-4080 = 140 points.  If you were betting in tenners, that's a loss of R1,400. Ouch!

7. Your Strategy
Paper trade until you're ready to bet with real money. Simply place imaginary bets and follow them. Subscribe to Nic Best's Spreadtrading service. He'll recommend which stock spreads to get into. This year he's made gains of 100%, 180% and 185%.

8. How to Protect Yourself
Use small unit stakes to start with. You can trade as little as 1c a point, so a bad bet won't bankrupt you. And as your stakes get larger, set a stop loss limit with your broker. As soon as your bet hits the agreed level, he will close you out. This strictly limits your losses.

Here’s to your wealth and happiness,

Pascale Barrow
Managing Editor of Personal & Finance Confidential

P.S. If you're a bit reluctant to invest in high-risk ventures, you could always try low risk investing. Find out more about low risk investment here...