An Insight into CMC Spreadbet

The Internet revolution is spawning new derivative products that offer individuals the facility to speculate online about the future direction of an equity, index, commodity, or currency. Of course every investment or trading decision is a bet about the future, so there's nothing new in that sense. What is new is the opportunity to eliminate the middleman and brokerage, and thus increase the ease and reduce the cost of trading.

'Dealforfree' is a new vehicle recently launched over the last new years offering new products. IG Index offers pure spread betting. CMC Spreadbet seems more comparable to trading equities in the traditional way than the other spread betting companies. It offers currency trading as well.

A 'share' transaction on the dealforfree trading platform is an arrangement between you and the British company CMC Group Plc. Cmc Spreadbet is a market maker (bookie) regulated under the FSA. In fact you are not buying or selling a share at all: you are trading a Contract For Difference (CFD) that hopefully mirrors the performance of the share or index it is derived from.

So you don't pay a commission for the transaction, only the spread between the bid and ask as you would in a traditional share transaction. Additional advantages are that you transact on margin (10% for shares and 3% for indices) as well as trade long or short with equal ease. To hold a long position a small daily interest charge is imposed, while a short position receives a small rebate. Dividends on the physical are accounted for as well.

There are three general concerns about the product for you to consider before you engage with this product. Firstly, will the spreads that are tight now remain so in the future, especially in very fast markets? Secondly, how robust is the Internet trading platform, especially in peak trading times. Thirdly, and most seriously, can CMC Spreadbet PLC continuously arbitrage its net position and manage its overall business so that it will be around when you want to collect your profits and/ or withdraw your capital? If it goes bellyup, so do you. Nevertheless in six years of operation overseas, these problems haven't surfaced.

Commission free trading has a number of implications. Yes of course is saves you money. The winner of the Personal Investor trading competition last year had over 300 trades on a $100000 account. At say $30 a round turn he paid over $9000 in commissions: a business cost of 9% which dealforfree would eliminate. However my concern as a coach is that commission less trading can lead to overtrading in those who lack trading discipline. Margined Internet trading on this platform could become like a computer game that could turn out to be very expensive if the trader does not have a trading edge in the first place.

This product is not free. Cmc Spreadbet collects the spread and naturally wants you to trade often and in size. It makes money when lots of people with opposite positions transact. Just because trading on this platform is so convenient do not give away your positional advantage of staying out of the market and trading only when you anticipate conditions that are very much in your favour.

Going to a leveraged account is like the transition from propeller driven to jet aircraft. Things happen much faster. If you aren't in control and succeeding within the conventional broking system then you are unlikely to succeed with dealforfree despite the advantage of not paying commissions. With this platform you must have a durable trading system and a trading style hallmarked by discipline and control.

As a trading coach I do not recommend this product for long-term investors who basically buy and hold and who rely on broker research and support. But for independent active investors and traders it is certainly worth a trial.

Dealforfree has a 'dummy' account for you to explore the software. You do need to be windows literate, but navigation around the platform comes easily with experience.

The dummy account allows you to become familiar with the excellent color coded trade execution system that allows you to place the full range of buy and sell order types for you to make use of: market, stop, limit, good till cancelled, day only, one cancels the other, as well as contingent orders. Intelligent use of the order regime allows you to get set even if you are unable to follow the market regularly through the day.

Unlike other demonstration accounts dealforfree does not allocate you a notional sum of money to basically paper trade. However, paper trading does not allow you to experience the 'real thing' of trading anyway. I suggest you move quickly into a real account, but initially only lodge the minimum deposit and trade in very small parcels until you prove your mastery with the platform. For index CDFs you can trade as low as $1 a point: a better start for prospective SPI traders who must start at $25 a point. You can trade as little as a one share CFD at a time.

Until you prove you have an edge I recommend that you keep you 'bets' very small and treat the experience as if you are in a trading gymnasium. Remember you are trading impersonally with a computer. Experience the slippage, test your trading ideas, develop your own trading style, but don't scale up your trading amounts until you have shown that you are profitable with handling small stakes.

There are two imperatives when trading with dealforfree. Never have an open position without a stop loss order entered, and always check for and cancel unwanted or redundant orders.

To be successful as a trader you have to approach it as a business. Dealforfree reduces the cost of doing business and so puts the odds that much more in your favour. The trading business requires you to manage yourself and your account so that you are in complete control in all market conditions. Dealforfree won't give you the critical factors of discipline, control and your own trading style. But it is a vehicle through which you can develop, demonstrate and apply these qualities. Otherwise you are just 'punting' and likely to blow your stake away.