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Jones, Shares: Most readers will have heard the term but some will not know exactly what it is - how would you best describe a spread bet?
Patrick Latchford, Finspreads: Exactly what it says - it's a bet, in this case on a financial market. At its most trivial, it can be light amusement; at its most serious it can be a financial instrument you can use as part of a portfolio of products for investing in the market.
Jones: What sort of markets can I trade if I have a spread-betting account?
Geoff Langham, CMC Markets, CMC: Basically, whatever the spread-betting company wants to offer. At CMC Markets, we treat it as a serious financial product so we only offer securities such as shares and indices, commodities, treasuries and foreign exchange.
Jones: Most of our readers are going to be interested in shares. Let's say I'm looking at the share price of BP and it's 504p to sell and 505p to buy. How do you decide what price the spread bet is going to be?
Dan Moczulski, IG Index: It depends on the contract. If you go for what's commonly referred to as a daily share or rolling cash share, typically it's whatever you see in the market. It's somewhat different when you're referring to futures contracts.
A spread bet generally has a time-frame attached to it, so when we make a price we have to factor this in. If you are looking at the FTSE or commodities, it's easily done as we can follow the futures market, but for shares it's somewhat different. We have to make the price synthetically by using what's referred to as 'cost of carry'. This is simply a calculation of the interest that borrowing at 505p, say, would incur over the period of the bet minus the dividends that the company may pay out, and then we put our spread round it. That is how we make a price. It's not a judgement on where the market is going, it's not a view or anything like that - just a simple replication of the share price plus interest minus dividends.
Jones: Let's talk about the different spread bets that are available. A few years ago, the bets had quarterly expiry so we had March, June, September and December spread bets. If we want to, we can still do a BP December spread bet, for example. As an individual private investor, is there a particular sort of spread bet I should be doing? Should I be doing quarterly bets or daily rolling cash-type bets, for example?
Ian Jenkins, Cantor Index: It's up to the client. Everyone has a different view - a different perception of the markets. Whether you take a December, a March, a weekly or a daily, essentially you need the share to move for you to make money. The sophistication of clients in this industry is growing, so the products are becoming more bespoke.
Jones: Is it fair to say the spread-bet price will near enough mirror the underlying share?
Ian Jenkins, Cantor Index: By and large, yes.
Dan Moczulski, IG Index: It's worth pointing out that not only will it mimic the share price in terms of the absolute level of the spread bet, it will also move with the price. If the share price moves 50p, the spread bet moves by 50p.
Jones: I think this is something that confuses people who haven't done spread betting before. They get confused into thinking it works in a similar way to options.
Patrick Latchford, Finspreads: The point is December FTSE or December BP or March BP isn't where Cantor or whoever think BP is going to be in March - it's a calculation that produces that figure. People need to understand there's a science to it.
Tom Hougaard, City Index: I think the biggest misconception about spread betting is that we have got anything to do with betting - you couldn't be any further from a bet. City Index is unfortunately forced to call itself a spread-betting company, but by no means are we like a bookmaker where you bet on Thin Lizzie in the 3 o'clock at Cheltenham. We supply retail investors with a vehicle - the tool by which they can trade the markets. Unfortunately we have to call ourselves a betting company because of the tax legislation. People trading through a spread-betting company are trading the underlying market and the spread is where we make our money, but they're not betting. You don't bet on the financial markets - you take a view, you speculate.
Jones: Another point is that your prices are not a prediction of where the market is going to be. It's a common problem when people start spread betting the Dow or the FTSE, for example. They look at their screens and see the FTSE at 4550, then look to the spread betters who might be the FTSE December at 4580, and they wonder why there's a difference.
Dan Moczulski, IG Index: What's important to realise is how all firms hedge their positions. We have to hedge in the most liquid market that we can see. Equally, we're trying to make a price that's instant execution-only, 24 hours a day, and we need to be able to respond to the most liquid markets.
The FTSE 100 index is just a number. People refer to trading the FTSE itself but you can't actually do this - you can only trade the futures. So the way that we make a daily price is by looking at the futures first and then bringing it back, removing the interest rates and adding the dividends.
With shares we can't do that. There is a futures market but it's incredibly illiquid and it only covers a small range of shares, so we take the share price as it is, plus the interest and minus the dividends. It's simply a spreadsheet that is calculating this - it's not as if someone at IG has hung over a screen working out what they think will happen. If we felt that we knew which way the market was going better than anyone else we'd be the world's greatest fund managers. We're simply producing a price based on the mechanics of dealing this as a futures trade rather than a trade here and now.
Ian Jenkins, Cantor Index: It's up to the clients to educate themselves here, I think. It's very easy just coming in saying, 'I've traded shares, it must be the same'. They must understand this cost of funding, because it is such an integral part of any type of futures trading.
Jones: This is all linked to the fact that spread betting is on margin, which is an important consideration for private investors.
Tom Hougaard, City Index: You say it's for clients to educate themselves but I think every spread better here runs courses. We try to educate our clients about how these things work, what risk they have, what kind of exposure they are subjecting themselves to in the market. Bookmakers want their clients to lose: is there anyone in here who does not want their clients to win? Of course not.
Jones: Let's say I'm a private investor who has been buying shares for the last two or three years, making one or two purchases a month. I know there's this thing out there called spread betting but, why is it relevant to me?
Patrick Latchford, Finspreads: Generally, retail investors have got to think in a much broader sense about how they're going to get some kind of return on their investment portfolios. The days when you're going to make a lot of money sitting on long-only equity positions are probably gone.
For example, it may be the shares you hold have serious short-term improvements but you feel they will probably come back down. You have an opportunity using a spread bet to take advantage of that short-term profitability without selling your underlying share position. You don't have to sell the shares, take a small profit, wait for them to move, buy them again and waste good money on costs. With a spread bet you can lock in some profit in the shortterm while maintaining your core holding.
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Jones: Why else should I look at spread betting?
Geoff Langham, Deal4free, CMC Group: The simple answer is that for one you don't have to pay stamp duty on the long position.
Jones: Just to clarify, long is when I buy shares and short is when I sell some I don't own.
Geoff Langham, Deal4free, CMC Group: You can short very easily with a spread bet. Shorting is difficult with a traditional share and often expensive. And thanks to the British government, spread-betting earnings are tax-free.
Dan Moczulski, IG Index: I suppose it's something I shouldn't be saying, but spread betting may not be suitable for everybody. If you are a person who buys and holds on to shares and just looks for the dividend income over the next 10 years, then it's not for you.
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Spread betting isn't one size fits all. When you have a short-term trade a spread bet will be more suitable - cost-wise and tax-wise - and possibly will be more flexible. If you are a long-term holder it may not be. But in the same way that you try and diversify your portfolio, it makes sense to diversify the types of investments you make, as well as the way in which you do them.
Ian Jenkins, Cantor Index: Spread betters have added whistles and bells to an otherwise quite morose and lazy market. Things like guaranteed stop losses - try asking your stockbroker for that. They've got lazy over the years and frankly spread betting offers a superior product.
Jones: Do you think that spread betting is a real alternative to traditional buying and selling of shares if you have a short to medium-term view?
Tom Hougaard, City Index: Yes. The world has changed radically over the last 10 years. We're living in a 'right-here, right-now' instant society and with the introduction of spread betting we're very much accommodating that changed lifestyle. It is a very exciting world because stock prices are as volatile as they've ever been and fluctuations offer real opportunities for those who are astute enough. By spread betting part of your portfolio and being part of the excitement and profit potential, you're also keeping on top of things. It forces you to make a constant valuation of what's going on, what's moving the market.
If you have a 15- or 20-year view, spread betting is not for you. But if you want to be part of the action, because spread betting is a leverage instrument it is perfect.
Jones: You mention leverage. One thing that puts people off spread betting is this idea of margin, of giving you more bang for your buck. How can private investors use margin so they don't end up losing their shirts if it goes wrong?
Geoff Langham, Deal4free, CMC Group: Margin is basically a facility that allows clients to purchase or sell more of an instrument than they otherwise could do with a traditional stockbroker. We are 1% margin for indices, for instance, so your $1 will buy you $100 worth of an index, say the Dow or the FTSE. It affords clients the possibility to substantially increase the multiple of their earnings or their losses.
Margin is associated with high risk because the leverage aspect allows you to buy more of a product than your capital might otherwise allow, and you could possibly incur losses greater than the initial capital. We do have tools - controlled risk bets, stop losses and the like - that the investor can use to make this a safer product.
Jones: Say I've got £1,000 to invest or speculate with. If I open an account with XYZ stockbroker and I fancy BP, I can only buy £1,000 worth because that's what I have in my account, excluding commission, stamp duty and all that stuff. If I open an account with XYZ spread betting company, my £1,000 will go a lot further. Let's talk about 10 times margin, for example: in theory my £1,000 could buy me a £10,000 spread bet on BP.
Dan Moczulski, IG Index: Although that is completely correct, I wouldn't look at it like that. You do hear about people losing their houses on the back of a spread bet, and whether or not it's a myth there is potential to lose a lot of money on these things.
With a spread betting firm or any other margin product you have two options. You could put that £1,000 down and get access to £10,000 worth of stock. Equally, you could put £100 down and still get access to the original £1,000.
What you've got to recognise is that if you're taking advantage of full gearing by putting £1,000 down and getting £10,000, you are holding a £10,000 position. If the market moves 10% you have lost £1,000.
Jones: So all my money is gone?
Dan Moczulski, IG Index: All your money is gone. What I would always suggest when a new client takes a trade out is to do the calculations. If you can't afford the whole position, don't margin yourself up to the whole position.
That would be my guideline for trading on margin. But in terms of its advantages, obviously you're only putting a small proportion down so you could use the rest to diversify. Your returns are that much more magnified, so if the market goes up by 10% your return is 100% on the capital you've put down. Make it work for you rather than against you.
Jones: So, margin is a double-edged sword but people shouldn't be scared of it - they should use it to work for them?
Patrick Latchford, Finspreads: That's exactly right. Use margin carefully and there is no doubt that it magnifies the possibility of making money and the possibility of losing money. It's there to protect not only the investor but also the firm that's offering you the spread bets. It's there so if the market does move in a certain direction that money is secured to cover a loss by the client.
Your returns are that much more magnified, so if the market goes up by 10% your return is 100% on the capital you've put down.  |
Jones: One way of looking at margin which helps people understand how it can work in their favour is this: Instead of tying up £1,000 in one BP trade with a stockbroker - when really if the share price drops 10% you're maybe going to sell it anyway - a much more effective way is to put £100 in a spreadbetting account and buy it on margin. You have your 10% stop in and you still have £900 worth of cash lying around for other opportunities, so you can use it in your favour and do not need to risk losing your shirt. Just because you have a Ferrari it doesn't mean you have to drive everywhere at 180 miles an hour. You can still be sensible. And the same applies to margin.
But what else can I do to try and minimise the risk? If I want to buy BP at five quid but don't want to still be holding it at £2.50, what can I do to try and get away from some of that risk?
Ian Jenkins, Cantor Index: Stops are the main catch-all - they really do limit your risk. But I don't necessarily think your appetite for risk would change just because you're using a spread better rather than a broker. Your appetite for risk should be about the same: this is merely the conduit, the vehicle for doing the trade.
Dan Moczulski, IG Index: You can also spread bet on an option price. If you're buying a call or buying a put, these by their nature have limited risk, because your option can't be valued at less than zero. You've also - more recently - been able to do binary bets on shares, so you can speculate that BP will rise within a week and even if it was to halve or go to 10% of its previous levels, your risk would be no more than the binary bet implied; however, you have no stop loss that can be hit out.
Jones: Let's walk through this as a private investor. I think BP is going to go up and I buy the equivalent of £1,000 worth of shares with my spread betting company. I need £100 in my account assuming I'm on 10 times margin.
If I don't want to sit there and watch the screen all day I've got a couple of options. Say I think that if BP falls to £4.70 I'm going to change my mind and get out, I can leave a stop-loss order. I'm out, I've lost 5% but I live to fight another day.
But of course the risk with shares is that if they come out with a profit warning they can go down the pan very quickly. So let's say BP did a bit of a Shell and said it had got its reserves wrong, and the share price dropped 20% in a day. If I've got a normal stop loss in and it doesn't trade at £4.75 but the first trade is at £4.30, it's tough luck isn't it? I'm out at £4.30. But if I absolutely want to cap the risk from the moment I place the trade I could place a guaranteed stop loss that - even if one day we all wake up and BP has gone bankrupt - then I am still out at £4.70.
Patrick Latchford, Finspreads: Yes, it's insurance. And if the stop loss was at £4.70 and in fact the market goes from £4.75 to the next trade at £4.25, we're going to stand up and you'll execute at £4.75. People need to realise that -and also with ordinary stop losses we will take our clients out as soon as we can, because don't forget we are in the market as well. It's not as though we sit there and wait for the market to collapse - you want to get these people out and keep them alive, so as soon as the market's trading we're back in there doing the best we can.
Jones: If private investors are afraid of spread betting, guaranteed stop losses can completely eliminate the risk. They make spread betting safer than buying shares, don't they?
Patrick Latchford, Finspreads: It's all about individuals' risk profiles. It's what they want to achieve in terms of a return at the end of the day. Do they want a modest 10% or are they looking for more racy 50% returns? It's going to reflect in the way they trade a spread bet.
Jones: What about the mechanics of buying or selling. It's not the same as ringing up a stock broker and saying, 'Hello, I'd like to buy 200 shares in BP', is it?. Let's say, for example, I think that over the next month BP is going to go up. To keep things easy, we'll talk about the bets that expire every day. I want to buy £1,000 worth of BP on a spread bet: what happens? How do you quote and what do I need to say?
Patrick Latchford, Finspreads: If you bought a thousand shares in anything it wouldn't matter, every penny that moves is worth £10 a point. This is the simplest way to look at it. Obviously 1,000 multiplied by the price of the bet gives you the total consideration. A thousand shares at £10 a point. If you phone up and tell the dealer, 'I want to buy the equivalent of a thousand shares,' he will tell you that you want to do £10 a point or quite simply, after two or three times of trading your shares, you would know this quick equation, and then you would simply phone up and say, 'I want to deal £50 a point, £60 a point'. It's up to you. Actually you generally find that some of the dealers are very, very helpful in explaining this.
Ian Jenkins, Cantor Index: One of the biggest tips I would ever give a new trader is never show your hand. A market professional would never say, 'I want to buy this amount, what's your price?' It just wouldn't be done. Just ask for a two-way price and deal pounds per point where you want to. You sell it at its bid price, you buy it at its offer price. It's way easier than clients sometimes think.
Jones: So I'd ring up and say, 'I want a price on BP'. They'd say it's 503, 504 or whatever. I'd say, 'Okay I want to buy £10 a point.' They'd say, 'Okay, you've bought at 504.'
Ian Jenkins, Cantor Index: Exactly. That is it.
Jones: That's easy, then! Let's talk about how people actually trade - are most of your clients day traders, in and out of Vodafone five times day? Are they short-term, days or weeks, or are they trading over a few months?
Geoff Langham, Deal4free, CMC Group: We have a variety of clients. When we invented Rolling Cash a few years ago it allowed customers to trade intraday and over a shorter period - far simpler than trading out to a future date. But it's just as simple to trade longer term and we're finding now that we have a good blend of clients who do trade intraday or over days, weeks or months.
Ian Jenkins, Cantor Index: Typically 10 years ago we would have had more City types but it's everybody these days - housewives, everyone.
Patrick Latchford, Finspreads: Finspreads has probably got one of the most diverse client bases. We have a smaller number of large clients who bet £500 a point down the FTSE and are doing it as a job, but on the other side we see a lot of new entrants to the market who want to look and try out spread bets. Some of them are thinking about taking it up seriously as a parttime career, others are doing it purely as a hobby. What's happened over the two or three years is that a lot more people from many walks of life are having a go at spread betting.
Tom Hougaard, City Index: We're starting to see a new trend where people treat it more as an investment - they're running a particular stock up or down, short or long, and once they're done they take the money back out and we might not hear from them for the next three months.
Jones: This year has been fairly sideways for the FTSE, the S&P, the Dow... what other markets should I be looking at?
We don't see a bear market as some inherent evil. We just want trends. We want it to go up or down. |
Tom Hougaard, City Index: People are always talking about the stock market dropping from year 2000 to 2002, and they put it into the context of some kind of national or worldwide tragedy. But applications and new accounts were rising during this period while the stock market was falling because people realised, 'this is beautiful, I can actually make money out of the market dropping every single day'. We don't see a bear market as some inherent evil. We just want trends. We want it to go up or down.
Jones: For a lot of people, short selling is an alien concept. If you think BP is going to go from £5 to £4.50, how do you make any money out of it?
Tom Hougaard, City Index: We often see stocks fall a lot faster than they are rising. A lot of City Index clients came to us during the bear market purely because they realised you could make money from falling markets.
Patrick Latchford, Finspreads: If you're only taking advantage of the up movements, you're effectively missing out on half of the opportunities. If the market goes down, the spread bet gives you the opportunity to benefit from that if you make the right call.
Jones: There have been some heated discussions over the last few months from people who say that derivative products like CFDs and spread betting - which allow people to profit from falling share prices - are ruining the stock market for investors. What would you say about that?
Geoff Langham, CMC Markets, CMC Group: Who's to say the market has to go up and who's to say it has to go down for a healthy economy? It makes just as much sense for companies to lose value when they're underperforming as it does for them to increase their value when they're doing well. And I don't see any problem with a company's value being accurately reflected by as many minds and investors in the country coming together and deciding what the price should be.
Ian Jenkins, Cantor Index: There's also the question of scale here. If you put all the spread-betting companies together, their percentage of stock-market trades is still minuscule compared with those of hedge funds and pension funds, and these have always had the ability to go short, so you're only introducing a tiny dynamic into the London stock market.
Dan Moczulski, IG Index: And all you're doing with spread betting and CFDs is allowing the retail client to do what institutional clients have been doing for decades.
Patrick Latchford, Finspreads: If the institutions see a few spread betters moving a price down and there's value in that stock, you can bet your bottom dollar they've got deeper pockets than all of us and they'll invest in that stock straight away, so it's not as if we can influence a stock down. The institutions with all that money behind them will always buy into value. Derivatives provide more flexibility in the market, which in the long term is better for the private investor.
Jones: Let's talk about another conspiracy theory. It is, I think, a common misconception that when it comes to things like stop losses, you make money by me losing money. If I buy my BP for £10 a point at 500p and I put my stop loss at 470p, the 'nasty spread better' will drive the market down to 470 and kick out my stop loss and then move the market back up again - because you're out to get me.
Tom Hougaard, City Index: No, we are purely a reflection of what's going on in the underlying market. Spread betters have no interest in their clients losing. We are purely reflecting what we see on the screen and when the price is trading there we have no option, we have no choice but to adhere to stop losses.
Dan Moczulski, IG Index: None of the firms here has the facility to push one price to one client and a different price to another client.
Jones: And if that was what companies were trying to do then someone's disadvantage would be someone else's advantage. If you drive the BP price down 5% someone's going to jump on it and buy it, anyway.
Jones: Online trading has seen a massive boom over the last three or four years. All of you offer telephone or online trading but does either method make any difference to an investor?
Patrick Latchford, Finspreads: The majority of our clients use our on-line trading facilities. They find it convenient, easy to use, easy to understand and very straightforward. However, we have a number of clients who like to talk to someone at the other end of a telephone when they're putting a bet on.
Ian Jenkins, Cantor Index: I think a lot of our clients would disagree with that. They get to know a broker and feel more a part of it, trying to work an order - what do you think you can get me at this level? What's the market showing? A lot of older clients wouldn't go near a screen: they have an inherent distrust, particularly in the opening 10-15 minutes of a stock market when there are very, very wide spreads - they need the dealer then to show market depth and stuff like that. I think a lot of our clients would be lost without our dealers.
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Geoff Langham, CMC Markets, CMC Group: Many of our clients have jumped on the IT bandwagon. More than 90% of our deals are transacted online. The clients like not having to talk with people, they like dealing with facts and figures, they like seeing the price they're dealing at - they're not waiting for a human to get them a price.
Ian Jenkins, Cantor Index: The thing is you don't always have the internet with you - you can't walk the streets with a PC. Admittedly now we've launched mobile, you're able to deal effectively on a Palm Pilot, but I think clients like the relationship with dealers.
Dan Moczulski, IG Index: You can't generalise on our clients. Some prefer the phone, some the internet, some the mobile dealing platform. One important aspect is that even if you prefer to deal on-line all the time you have to make sure there is adequate phone back-up. To use the analogy of a cash machine, if it's not working you've got to go into the bank. It's important to cover all eventualities.
Jones: Let's talk about opening a position. Say I'm chartist and I know the high for the year on the FTSE was 4600 and I think - if it breaks through here I definitely want to be a buyer because I think it will go through the roof. How can I use an order to get me into that position so I don't need to sit there and watch the screen all day? Is there a way of using a stop order to get me into a trade?
Ian Jenkins, Cantor Index: Absolutely. Simply put, it's an 'opening stop'.
You can open and close with stops and limits. With a stop - whether it's an opening or closing stop - you're always looking to do a deal at worse than the prevailing market level. With a limit, whether it's opening or closing, you're always looking to do a deal at better than the prevailing market rate.
Jones: Let's say that 4600 is the big level. I could put an order in to buy £10 a point if the FTSE gets to 4610.
Ian Jenkins, Cantor Index: And you can then leave a stop on the back of that.
Jones: So when the trade gets filled, when I've bought at £10 a point, then there's a stop loss that I've placed earlier on which becomes active. I could say - I want to buy here and if that order gets filled I want to have a stop loss at 4550, for example, so I can automate the whole thing.
Dan Moczulski, IG Index: A good example of when you might use it is if a piece of news is coming out and you don't know whether it will be good or bad. Let's assume that you're hoping it is good news and that the market will ramp up. Leave an order to buy the market 20 points above where it is.
Jones: So you're buying into the strength, banking on that strength carrying on.
Next, let's talk about limit orders. If BP is trading at 500 and I want to pay 490, all of you will take limit orders to buy at that price. They're effectively orders to sit there waiting to see if BP trickles down and the order gets filled. The spread betting companies will do the work for me. Four or five years ago, this was something you couldn't do through a traditional stockbroker. There are some now who will take limit orders and stop losses but I think this whole order process has been driven by the spread betters from day one.
Tom Hougaard, City Index: You're absolutely right - you can do everything on-line. You can put in your limit order, put in your stop loss if your limit order is initiated, and the next step is to trade in stop losses. We have a process where once your position is going into profit it continuously moves your stop as the stock price goes up.
Jones: What can spread betting companies give me to help me understand more?
Patrick Latchford, Finspreads: Finspreads has a specialisation in this area. We like to think we're the home for people who have never spread-betted before, for a number of reasons.
Firstly we have a Training Academy which takes them through eight easy steps of how to understand what a spread bet is and all the implications around spread betting. We educate those clients over an eight-week period. We allow them to trade in very small size during that period, as little as 1p a bet. That allows them to get a feel for what's going on - not on the demo cam but in the real market.
Geoff Langham, CMC Markets, CMC Group: At CMC we also offer a demo account which is exactly the same as the real account, although obviously not using real money. Our investors and new clients find that very useful - it allows them to learn the intricacies of the software, shows their account balances, the effects of the trades, the values of the trades - everything you need to know to manage your positions.
We also offer weekly seminars that you can attend on spread betting, technical analysis and fundamental analysis, along with the various packages we offer through the software such as charting and fundamental news. All that's supplemented with television that everyone can tune into. Our minimum balance or opening account is £1,000, and you can trade as low as £1 a point with us.
Jones: Dan [Moczulski], what sort of stuff do we get if we open an account with IG?
Dan Moczulski, IG Index: All that's just been mentioned. One other service offer we're keen to stress is that clients also get an account manager, and we have a team of people to help you before you open the account.
Opening the account doesn't cost anything, doesn't require you to put a deposit down, and you have a manager who sticks with you for the lifetime of your account. Learn from the account managers, ask them questions to make you feel comfortable before you trade. We'd all agree that a situation where a client does not understand how a bet works after he's placed the trade is unattractive to both parties. We stress that if there is anything a client wants to go through, they can just give us a call or send us an e-mail. We will do everything we can to make sure our clients are comfortable with how spread betting and their accounts work.
Ian Jenkins, Cantor Index: One of the main ways people will break their fear barriers down is by talking to dealers and coming into the office. We have a Monday night when people can come in and as soon as they meet the dealers they realise it isn't nearly as fearful as they think.
Jones: How about other markets? Oil or currency, for example - there's never a dull moment in those. Is it an easy transition from investing in shares to spread betting in the wider markets?
Tom Hougaard, City Index: People need to make sure they understand what they are going into. With the share market, if you choose stock like Vodafone and are trading at £10 a point you're probably not going to have any nasty surprises. If you are trading the oil market, you might find yourself on the right or the wrong side by a significant amount.
Whenever you go into spread betting, it does help if you have a pretty good idea of how the markets move, especially if you start trading the more volatile instruments like currencies or commodities. There was a Friday half a year ago when gold dropped $16. In spread betting terms that's a 1600-point movement and very significant.
Patrick Latchford, Finspreads: A lot of our clients enjoy trading the indices, the FTSE and the Dow. Clearly many also trade shares, but increasingly where you see the more volatile markets - such as currencies and the commodities - people are getting into the game. But if we can take the analogy of going to university and studying for maths, the last thing you'd do at the end of a three year course is take your exams in biology, because you're going to fail. It's very important to be comfortable in what you're trading and to educate yourself. Allow the spread betting firm to help you - don't just jump into a market you think you're going to be able to take advantage of. It's always better to take these things slowly, bet small amounts in the first instance and feel your way in.
It's very important to be comfortable in what you're trading and to educate yourself. |
Jones: A big thing that spread betting does for individuals is allow them to decide their own levels of risk. Ten years ago if you wanted to be involved in the currency markets the easiest way in was through currency futures but the minimum movement was $10 a point. With a spread better you can wind that risk down to a dollar a point or even lower.
Dan Moczulski, IG Index: When you're new to spread betting, stick with what you know. If you've spent the last 50 years following the FTSE, stick with the FTSE.
Jones: If I fancy the idea of putting a small amount of money into an account and starting to learn about spread betting, and all I've done for the last couple of years is bought and sold shares through my stockbroker, what do I need to show you to get an account? Do I need to prove I'm massively experienced?
Geoff Langham, CMC Markets, CMC Group: A key difference with spread betting is that you're classified as a private customer and as such do not need to show that you have previous trading experience. You do, however, need to show that you have an appreciation of the risks involved. The rest of the process is very simple and quick - prove your identity and address, sign a terms of business contract, fund the account and off you go.
Dan Moczulski, IG Index: We can, and I think several firms are the same, set up the whole thing over the internet in a few minutes.
Patrick Latchford, Finspreads: If you want to have a go, you can go on-line with Finspreads.com, open up an account in 10 minutes, put £100 in your account and start trading fairly quickly.
Jones: What measures to do you have in place to protect people from themselves?
Dan Moczulski, IG Index: First, we won't open accounts for people who are unsuitable - a typical student, say, whose income is his or her grant. Secondly, when they've got an account, they all have limits attached that we allocate through the risk profile and the circumstances of the client, so they don't make any mistakes that would potentially lose them far more than they anticipated. We even have what we call a limited risk deposit account where you can't lose any more money than you've specified you are willing to risk.
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Tom Hougaard, City Index: We do consider every single applicant, whether we find them suitable or not.
Ian Jenkins, Cantor Index: There's a financial constraint as well. The last thing we need to be doing is chasing a load of people for a £1,200 or £3,000 or £800 debt. If you put due diligence in at the start you can prevent much of that.
Jones: The last few years has seen an explosion in spread betting. Do you think it could spell the end of traditional share trading? And is the stock market feeling the pinch?
Geoff Langham, CMC Markets, CMC Group: No, I don't think this is the end of traditional share trading. Some people will always prefer to deal in a way that they've been accustomed to over the years. People also gain benefit if their view on the stock is long-term.
What I do think it means is the large institutions losing business to companies such as ourselves, more at the retail end of the business, because the advantages we offer are superior to the traditional share trading house. Over time people will become more comfortable with the idea.
Patrick Latchford, Finspreads: Regarding short-term trading, the question should be, 'will it be or should it be the death knell of traditional stockbrokers?' The answer is yes, it should. But this probably won't happen. Some people will be comfortable with the brokers they've been using for years, and it will take a long time to persuade everyone of the benefits of short term trading through spread betting or CFDs. So it won't be the death knell but it should be - because it's by far and away the most efficient and economic way to trade shares, for example, in the short term.
Ian Jenkins, Cantor Index: Stockbrokers have a different relationship with their clients in as much as many of them are allowed to advise, while we are all 'execution only'. If for no other reason, it means spread betting does not spell the death knell of stock brokers.
Jones: If you're using an execution-only broker and you're buying and selling with a few weeks' or a couple of months' window....
Ian Jenkins, Cantor Index: Then you'd be mad to use a stockbroker.
Jones: We've seen more companies move into this market and the structure of bets change. What changes do you think there are going to be over the next few years?
Dan Moczulski, IG Index: I don't think we'll see many more new entrants into the market. With 24-hour phone dealing, 24-hour internet dealing, mobile phone dealing, the range of binary bets and experienced dealers, any new entrant has a lot to catch up on. What I think we will see is a move towards the existing firms spreading themselves internationally and far more products that a UK client can trade on - whereas we currently offer over 7000 shares in the UK, US and Australia; in most other countries it's say the top 100 or so in each. I think this will increase if they're interested in the French or German or Asian markets.
Tom Hougaard, City Index: We already do offer all the major shares in Europe, as well as 400 shares in the US, 200 in Australia, Japanese and other Asian stocks and their indices. We have offices in China, Hong Kong, Australia and New York. So this is already happening.
Jones: What other changes do you see happening?
Tom Hougaard, City Index: I think spread betting will become more established. We'll start seeing not just retail clients doing spread betting but larger institutions, hedge funds, pension funds and, perhaps, private equity, moving into this sort of product. They'll realise it's no different to what they're doing now, except that they won't have to be incurring as much in charges.
Patrick Latchford, Finspreads: We're at the beginning of a seismic change in the investment management community. People are going to be more sophisticated, more interested in what's going on in their investments. This all points to a desire for more knowledge on more sophisticated products, and that will play into the hand of the spread betting firms who are already trying to push out those barriers and educate people on the advantages of using other products.
Ian Jenkins, Cantor Index: There's a plethora of small companies out there, and I think a lot of them may get squeezed because the big boys are going to get involved.
Tom Hougaard, City Index: Last time we had this round table discussion I said I felt it was just a question of time before the UK banks started to look at spread betting companies. Since then, two of the biggest have signed up with City Index and we're offering our services to them on the CFD side. It will only be a matter of time before their clients are saying,
'Why should I even consider trading my shares through you when my average holding period is six or eight weeks and I can do all this through spread betting tax-free?'
Brought to you in association with MoneyAm Shares Magazine
