Introduction
Back in the 1980s, spreadbetting was little more than a fun sideline for Londoners, but today this business offers a well-established form of alternative investment and is becoming more of a mass-market product.
Most investors like the fact that there are no commissions or broker fees payable on spread betting and that profits are tax-free. This is all well and good and although spread betting is not a one-way street I need to warn you that it is still a risky business. You can lose more than you initially invest. It does not suit all investors. In short, you should only speculate with funds that you can afford to lose.
The biggest difference between spread betting services now and those of a few years ago is that the spreads are much tighter. This means that your costs to enter and exit a trade have been brought down which is good news all-around as the break-even point is now that much lower.
⇑ ⇑ ⇑ ⇑ Choosing a Spread Betting Broker
For the investors across the world there are further important considerations:
- 1. Am I trading on a stable platform? If I need to make a trade or close one now will the platform be up and running or down for 'essential maintenance'?
- 2. Costs - the main costs in spread betting are the size of the bid-offer spread and financing requirements.
- 3. Are the margin requirements competitive? (should be 30% or less)
- 4. Level of customer service.
- 5. Functionality and ease of using the platform (does it offer advanced stop order functionality?).
- 6. Are my funds safe? Or should the company in question go bankrupt I stand to lose everything I have on deposit?
- 7. What happens if I trade on a particularly volatile day? How can I reduce my downside?
Aren't they more or less the same?
No, that's why you need to be careful when you select a spread betting provider. Some have better prices, some offer a wider range of markets, some allow you to access their spread betting software in lots of different ways, some don't. If you're new to financial spread betting, some spread betting providers provide excellent spread betting guides and educational resources. If you're into your technical analysis some providers will have more sophisticated charting and market analysis packages.
The width of the bid-offer spread on a spread betting quote will determine how quickly an open trade is likely to become profitable, especially when linked to the financing costs of holding the position. The wider the bid-offer spread the more the price of an underlying asset must move in order to make a trade profitable.
The biggest difference between spread betting services now and those of a few years ago is that the spreads are much tighter. This means that your costs to enter and exit a trade have been brought down which is good news all-around as the break-even point is now that much lower.
However, beware that with regards to spreads and CFDs, the commission is usually not the relevant cost. The real costs can be much, much larger and nicely hidden away. Every provider is different and caters for a different type of client. You will need to do your own research but as a friendly warning, if you focus just commissions then you are almost certainly going to lose money.
Which spread-betting company should I choose?
Clearly the choice is yours. It is best to choose a spread betting company with tight spreads as otherwise you may find that your profits are eroded substantially due to wide spreads made by some spread betting companies. A number of spread betting firms recently reduced their spreads on the FTSE and DAX rolling daily bets to just 1 point. These firms include Ayondo. Good news for DAX and FTSE traders, and we will be looking out for more good news on other instruments.
A note about the bid-offer spreads though. Make sure that when spread betting with a provider you are really getting a cheaper trade. A smaller spread doesn't necessarily you pay less for that trade. You need to take into consideration slippage, potential for re-quotes...etc. (which I hasten to add is not a cause for complaints unless these issues are severe - it is just a normal part of trading). Some providers may also widen the spreads during times of economic turbulence or withdraw tradable prices altogether given severe unfavourable market conditions and this is something you don't want.
Margins - the amount of money that spread betting providers require you to deposit with them to open a position vary substantially from firm to firm and are extremely changeable. Some spread betting firms like Cantor increased margins very quickly when market volatility increased, others didn't immediately follow. In general terms margins should be competitive but other factors are more important unless you wish to remain permanently overleveraged.
Financing costs linked to rolling long spread betting trades taken over an extended period of time can also add up with time so it is important to choose a provider that charges low financing rates (usually range from 2% to 3.5%; obviously the lower the better). There is a point at which the financing cost of running a spread bet offsets the benefit of not having to pay stamp duty and commission costs on share purchases.
A guaranteed stop loss is the only way to ensure that you only actually lose the predetermined amount of money that you decided. Not all spread betting providers offer guaranteed stop losses - and most of those who offer them charge a fee for this, either as a flat rate or a percentage of the trade. Note that guaranteed stop losses are usually only offered on certain major markets but different firms have different policies.
Some refer to spread betting as being a mug's game. I don't buy this. Spread betting is just a part of a trading platform arsenal. The bulk of grumbling I've seen about spread betting firms allegedly fiddling with prices has been from people trading intraday, where one or two points can be the difference between a profit or loss. This is not really so relevant when one is holding a position over the longer term (weeks or months). It is a known fact that most spread betting providers do not welcome scalpers as they are unable to hedge their exposure on very short timescales. It is true that occasionally you might be re-quoted or encounter execution delays but most of these so called 'incidents' are a thing of the past. The main reasons spread betting gets a bad reputation is that it is very easy to overtrade on very short term fluctuations in markets, and secondly it allows you to get seriously leveraged. If you avoid these two traps, it can be a tax efficient way of investing and any gains or losses will be down to the quality of your investment decisions.
Read the terms and conditions of opening an account carefully and remember that if you aren't happy with a spread betting company you can always move to another one. 10 years back, you needed £5000 to open an account with CMC Markets, then this went down to £1000 and now it is only £200.
Spread betting investors are covered by the The Investors Compensation Scheme and this and the handling of complaints and legal status of spread bets are covered in this article.