Advantages and Disadvantages of Financial Spread Betting

Opinion: What I Like and Dislike about Spread Betting

What I Dislike about Spread Betting

You cannot join the bid or offer. Rather you are left with only the ability to hit or lift.
The spread. Say you're spread betting the FTSE 100 index. The cash = 4698. The spread is 2pts and 4697-4699 is offered. The markets starts to rally up and you buy just as the spread betting company skews the price to 4702-4704 (still 2pts). You pay 4704. The index climbs 10 points to 4708. Momentum drops and you want to close. However the price offered is 4700-4702. You now hold a losing position even though the market is up 10 points. This is skewing. Also, not suited to scalping.
The 'spreads' are slightly larger than on the stock prices so you have to get bigger gains before you can move into profit (guess this compensates for the 'no dealing costs advantage).
All spreadbetting companies 'widen' the spread early when the market opens (an 4 point spread can suddenly become say a 8 point spread). This can cause you to get stopped out 'unfairly'. I assume this is to 'protect' themselves until they know what direction the price is going to move.
Sticky closings. You can open a position easily enough but when you try to close it won't close. You are constantly "re-quoted". This is the spread betting company waiting for the market to move into its favour. Say the close has "gone of to be processed" and you are staring at a rotating egg timer, when the deal is done and get the info back dont be surprised if it was done at a worse price!
The spread tends to be based on big figure moves and minute details such as moves on the small figure tend to get obscured.
Many firms offer charts but they might be subject to 15 minute delays. Any intraday momentum trader will till you that 15 minutes is a heck of a long time.
The spread between the bid and the offer is sometimes too wide especially for illiquid stocks. Hence, you have to be correct most of the time since if it goes against you on a points basis you are already 3 or 5 points in your face. Scratching a trade is very rare.
If trading contracts that see most of the action on the small figure, for instance, Euro Bund, Gilts or Brent crude futures contracts the spread between the bid and the offer is not even worth a punt.
A lot of people suffer with spread bets because margin is used. If you take on too much margin (risk) then even small moves in the underlying can cause serious problems. If a trade goes against you and you have insufficient funds in your account to cover the losses either of two things can happen: 1) The company issues you with a margin call requesting you to deposit more funds; or 2) If you position is seriously in the red the provider might close out your position automatically. The second instance will reduce the control you have over your trades.
Spread bets by nature are short term and although you can roll them over, guess what, you will have to pay more commission to do so. For extending quarterly spreadbet contracts beyond the expiry date, for instance, you will have to close out the position in the September market say, and open up a new position in the next available quarterly which implies that you will have to cross the bid-ask spread twice more for every roll forward. In fact, one of the differences between spread betting and owning shares is that with owning shares, there is no 'running costs' and you can keep them for years (although of course one can say that commission, stamp duty and capital gains tax are all 'owning costs' of shares). Spread betting incurs a financing charge for rolling a daily position overnight. This means that with the present low interest rates holding shares will work out cheaper than spread betting if the position is held for more than 70 days (for lesser holding periods, spread betting will be more cost effective since it doesn't incur stamp duty).
Whether it is spreadbetting or buying put options, you have to take a position as to both (1) how much it will go down and (2) by when. Unlike a binary bet, it is not an all-or-nothing bet, but the payout is a sliding scale. There will be a breakeven point, below which the bet makes money, and this will always be lower than the current share price (for a short). The more the share price falls below that break even point, the more money you stand to make. If the share price never falls below the breakeven point, you lose your stake. This is the main risk factor with spread betting and puts - time works against you. You have a view of the market, but it is notoriously difficult to predict WHEN it will happen. For instance, if you are predicting a fall in a share price of a security the fall in the share price you are predicting has to happen within a certain period. The longer that period is, the higher the premium you pay on your bet and therefore the deeper the required fall in the share price for the bet to make money. If the share price stays flat or even goes up during the period, you lose your stake, even if it crashes down the day after the expiry of the bet.

We must stress that although spread betting is extremely useful as a trading tool, it is best suited for short to medium term trading. If you are looking for longer term investments (for instance: over a year) you might want to look elsewhere.

What I Like about Spread Betting

In the UK there is no Capital Gains Tax to be paid on any winnings because it is classed as 'betting'. Most of my holdings are in spreads a) because of the tax reasons and b) because it's cheaper and easier to get in and out quick.
No stamp duty or brokerage commission. Just consider that when you only pay 0.1pc (i.e. 0.075% above and below the bid/offer on the London Stock Exchange) when dealing in a FTSE 100 share at SpreadCo. On a 100 per point spreadbet (which is the same as buying 10,000 shares) for a popular stock like Barclays trading at £3.50, it would cost the buyer some £102.50 in fees/taxes. When dealing through a spread betting company you only pay £8.75. To understand this better you have to take into perspective that Barclays stock is traded on about a 0.5p bid/offer spread on the LSE meaning that your costs would add up to over 2p to the price.
For a small portfolio size trading on margin helps boost profits - equally this can lead to big losses.
You can trade with a small amount of funds because it is 'leveraged', i.e. depending on the stock I can get 4:1 and even 10:1 leverage (top 100 stocks). In fact, quite often I trade in small quantities (sometimes as low as £500/£600 lots) without being penalised by broker commissions which could be 4% on such a small value.
Another beauty of spread betting is that you can bet very small to start with, perhaps just 10 pence a point in FTSE or Vodafone. And this is a big advantage over some of the other leveraged products available today.
One unique advantage that smaller traders using spread betting to trade have over institutions is the ability to nip in and out. Its much more difficult to quickly exit or enter a position with 000's of holdings, and hence you can (should be able to) limit losses more effectively.
And if you have an opinion but aren't quite sure where the share price is going it is very easy to add/sell in small increments...
You can go 'Short' equally as well as you can go 'Long', again because you are betting on the price rather than actually 'Dealing' in stocks.
All the trading psychology is there.
Because a spread betting firm makes its commission of the spread that edge is taken away from you. Therefore, it's more challenging. It makes more demands on your skills as a market professional and tests your abilities more.
Ease of use and real advantages as a hedging tool.
Great way to practice trading strategies and making complex trades with minimum risk.
You can set 'Automatic Stops'. And I like the fact that with spread betting you can take money out the bottom as share prices rise by raising your stop loss.
Bet as little a pound or as much as you can afford. There are limits but open several accounts with different firms and you're awry. Dangerous though so don't do it.
A single currency makes it very easy to track your performance. For instance if a share rises 17 points on the day, it is simple to calculate your profit knowing that you have made, say a £10 per point increase than it is to calculate the number of shares X 15 points plus currency conversions, broker fees and stamp duty.
You can spread bet FTSE 350 stocks at SETS prices - admittedly not as good as touch prices but there's not usually more than 0.05% in the spread i.e you could buy Vodafone at 138.5p but pay 138.495p at touch.

However, I think most of the dislikes will with time be reduced. Tighter spreads are going to be on the horizon. Wall Street Cash has a 4 points spread and I can see that reducing with time as more and more firm enter the spread betting market place and more competition sets in.