Spread betting has been the big noise in the private investor trading market for a number of years now. Ever since Stewart Wheeler, the founder of IG Index, hit upon the idea a couple of decades back of simply trading on the price of gold and not the actual commodity, spread betting has offered access to markets previously the domain of the institutions. Now, via shares, indices, commodities, currencies and out into the world of sports betting, the spreads markets are the most attractive, easiest to understand and cheapest option for anyone who has ever been taken by the idea of playing the markets for profit. Or at least that's the idea.
Like contracts for difference, spread betting derives from the future and options markets in the sense that you have at your disposal all the "joys" of trading on margin and going long or short on your position. Perhaps the key to understanding spread betting is to say that, unlike fixed odds bets where the stake and the potential losses or gains are known in advance, with spread betting the profits or losses are not known until after the fact. In simple terms it means that the more right you are in your judgement, the more you will make - and the obverse if you get it wrong.
"Spread betting is a high-risk, high-reward activity offering you access to the world's major financial markets," says Cantor index. "It has a wide range of applications suitable for a broad spectrum of investors, enabling you to back your intuition by betting on the price movements of numerous shares, stock indices, currencies, commodities and bond futures."
At the heart of the attractions of the spread betting proposition is its tax-free status. As IG Index puts it: "Because your transaction is a bet, your profits are free from UK capital gains tax and income tax." Also, in terms of trading on shares, because you are not physically buying a share when you trade, you are also free from stamp duty. Unless Gordon Brown gets really desperate in the next few years, this situation shouldn't (though we can't say won't) change.
However, the advantages go further than that. "A financial spread bet allows an investor to bet on whether they believe that the price quoted for a given financial instrument is likely to strengthen (go up in value) or weaken (go down in value)," says Deal4Free. "The profit or loss for a spread better is therefore determined by the price at which they sell. Unlike the investor who directly purchases and therefore owns the physical financial instrument, the spread better will be betting solely on their prediction of the price movement (up bets or down bets) of the selected underlying physical instrument."
"The spread in the phrase spread betting," adds Capital Spreads, "refers to the sell and buy price quoted by a spread betting company. This price is calculated around the live (or the estimated future) market price of a financial product. When you spread bet, you do not buy the stock or share but instead you make a bet as to which way you think the market or share price will move. You can bet per penny or point movement - the amount you wish to bet is known as the stake and can be as little as £1 per point or penny movement."
Finspreads provides an easy-to-understand example. "If you think that Wall Street will rise in value, then you request a price. The trader will give you the spread - for example, 9781-9790 points - you then buy at 9790 for an amount (say £2) per point movement. If the price moves up to 9870-9879 and you then sell at 9870, you would realise a point profit of: 9870 (price you sell for) minus 9790 (price you bought for), which equals 80 points. As you have placed a trade of £2 per point, you would make a profit of £160."
Of course, the problem comes if Wall Street goes into reverse. However, all the firms offer stop-loss capabilities designed to limit your losses. "To limit your trading risk, we recommend that you place a stop-loss when you open a new position," says Finspreads. "This will help protect you if the price moves against you. For a small charge (debited from your cash balance), you can guarantee your stop-loss to eliminate the risk of slippage or market gaps. A 'guaranteed' stop-loss will ensure that this price is guaranteed even if the underlying price moves through your stop loss level."
IG Index offers "controlled risk" bets designed to serve the same purpose: "When you open a controlled risk bet you specify the level at which you want your bet to be closed, should the market move against you," it explains. "We guarantee that your bet will be closed at exactly this price, even if the market moves straight through your level. So there is no danger of losing more than you expected on a big market move."
Obviously enough, we are very much in favour of spread betting as a form of trading. In terms of ease of use, access, relative costs and adaptability, it should provide one of the automatic starting points for any budding trader.
There are, of course, caveats. Like any form of trading, anyone getting started with spread betting has to be aware of what they stand to lose should the markets go against them, as they surely will at some point. But all of these amount to common sense. If there is one sure way to lose money trading, it is through going in blind. Avoid this, and you will be halfway there.
Once mastered, the trading basics will give you a platform. From there, it will be up to you. Many of the spread betting firms offer courses for those who want to know more. Meanwhile, there are many books and websites that offer more information for the intermediate spread better onwards.
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