Financial spread betting

Spread betting is a financial product that has opened up trading on a wide range of markets, and put this within easy reach of the public at large. Firstly though, to clear up a common misconception, this is NOT actually betting in the traditional sense. In a traditional betting scenario, you would say, back a horse to come first in the 2:30 at Cheltenham - you are looking for a specific result at a specific time ie: first at the finishing line on 29th of June at 2:42.

With spread betting, you are backing your considered judgement that a share price or market level will be either higher or lower than it is now, at a set time in the future. You can at any time, come out of a trade and take your profit - you do not have to wait until the expiry of the trade, which is often some months in the future.

Why spread bet? 

• Spread betting is a leveraged product, so you can win large sums by only having to put down a relatively small amount of initial capital.
• Spread betting is tax free.
• You can restrict the danger of loss to a pre-determined amount.
• You can make money regardless of whether the prices/markets go up OR down.
• You can use the product to offset the chance of losses elsewhere in your portfolio.
• You can exit a bet at any time you wish, thus locking in any profits.

How do I get started?

Firstly, you must sign up with a spread betting company - there are several very good, customer friendly companies out there. You will have to complete the relevant documentation to open your account and usually send copies of such things as utility bills, bank statements, credit card statements etc, as proof of identity and address. You will also need to send an initial deposit to get your account activated.

The entire process is very easy, and because of the way in which spread betting companies make their profits, they actually want you to make money!!

To this end, some of the companies run seminars for their clients, host open evenings and one company that I myself use, sends out regular weekly training pamphlets over the course of eight weeks for their new clients. You may also be allocated a personal account supervisor until you gain confidence.

Before you trade

• Once your account is opened you must decide upon the market or share that you will trade. There are some basics that you must ascertain about your market before you proceed with your trade.
  At what times do the markets trade? For instance, the UK share market runs from 08:00 until 16:30. If, on the other hand you were trading US shares, their market runs from 14:30 until around 21:00 our time. If you were trading volatile markets, this information would be a guide as to whether you wanted to close out a trade at times that you were not able to monitor the trade closely.
• What increments are being traded? Trades are placed at pounds per point. It is vitally important to determine what actually constitutes a 'point' before entering your trade. As an illustrative example, when trading shares one point equates to one penny of the share price. When trading currencies, however, a point can often equate to 0.0001 of the currency value!
  
• What is the expiry date of your trade? Upon entering a trade you will select a date in the future, at which time, the price will have moved either up or down according to your judgement. With shares, expiry dates are: March, June, September and December. You must either have exited from the trade by this time or you will automatically be closed out on the trade's set closing day.

How does it work?

 Let us assume that you want to spread bet shares - let us look at this fictitious scenario to see how it works:

You have been following the shares of British Airways and have formed the opinion that they are due to go down (remember, you can make a profit whether the price goes up OR down)

• The spread betting company quotes a spread of 546 (sell)  -  550 (buy)
• You 'sell' £40 a point at 546

The share price fluctuates throughout the day, but you still believe that the price is heading down, so you keep your bet open. A few days later, the markets take a tumble, taking the price of BA shares with it

• The spread betting company is now quoting BA at 496 - 500
• You decide to exit the trade so you now 'buy' at £40 (cancelling your original 'sell' at £40). This is done at the quoted 'buy' price of 500
• Your profit is (546 - 500) x £40 = £1,840 Tax free.

Stop loss orders

Large sums can be made from spread betting using a relatively small stake. In equal measure, markets can at times be volatile, a trade can go against you, and you can loose large amounts.
To protect yourself from large losses you MUST ALWAYS place a stop loss order when you enter a trade.

A stop loss, is an instruction to the spread betting company, to pull you out of a trade at a certain price, should the trade be moving against you. By using a stop loss you restrict any potential losses to a level that you are comfortable with. Let us use our previous example as an illustration:

• The spread betting company quotes a spread of 546 (sell)  –  550 (buy)
• You ‘sell’ £40 a point at 546.
  
• You placed a stop loss order at 550.

There is a news release that BA’s profits for this quarter have risen by 35% more that expected – the share price rises…..

• The spread betting company is now quoting BA at 596 (sell) – 600 (buy)
• Your loss, if you had not placed a stop loss would be (600 – 546) x £40 = £2,160
• Because you protected yourself with a stop loss…your actual loss would be (550 – 546) x £40 = £160 - certainly a substantial difference!!!!

Final thoughts

Spread betting is an easy to execute way of trading the markets. You can trade instantly, get prices and monitor your trades in ‘real time’ via your spread betting company’s website. You can trade anywhere in the world that you can find an internet connection.

The biggest advantage of trading this way as opposed to buying shares from a traditional broker is that you can trade on margin, rather than have to pay for your shares in full. Look at the following illustration:

• Buying through a broker You buy 10,000 shares at £2.06 – the total cost will be £20,600 PLUS Stamp duty and commissions.

• Spread betting You buy in at £100 per point at £2.09( higher than the brokers mid price because this is a futures price) – the total margin required will be £2,090  - (On FTSE 100 shares the initial margin is usually 10% of the share price multiplied by your stake – so: buy £100 per penny @ £2.09 = 20.9 x £100 = £2,090

• Spread betting is a leveraged financial product enabling you to make large sums of money with relatively little outlay. Conversely, unless you protect yourself, you can loose a great deal more that your initial stake!!!!

To this end, you must ALWAYS USE A STOP LOSS ORDER when you place a trade.
Spread betting may not be suitable for everyone and if you are in any doubt as to its suitability for yourself, you should seek professional advice.