Advantages and Disadvantages of Financial Spread Betting

Opinion - what I like and dislike about spread betting


What I dislike about spread betting:

  1. You cannot join the bid or offer. Rather you are left with only the ability to hit or lift.
  2. The skew (which is the worst). Say you're spread betting the FTSE 100 index. The cash=4698. The spread is 6pts and 4695-4701 is offered. The markets starts to rally up and you buy just as the spread betting company skews the price to 4698-4704 (still 6pts). You pay 4704. The index climbs 10 points to 4708. Momentum drops and you want to close. However the price offered is 4702-4708. You now hold a losing position even though the market is up 10 points. This is skewing. Also, not suited to scalping.
  3. The 'spreads' are larger that 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).
  4. All spreadbetting companies 'widen' the spread early when the market opens (an 8 point spread can suddenly become say a 15 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.
  5. 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!
  6. The spread tends to be based on big figure moves and minute details such as moves on the small figure tend to get obscured.
  7. 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.
  8. 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.
  9. 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.

What I like about spread betting:

  1. In the UK there is no Capital Gains Tax to be paid on any winnings because it is classed as 'betting'.
  2. No stamp duty.
  3. 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).
  4. 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.
  5. All the trading psychology is there.
  6. 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.
  7. Ease of use and real advantages as a hedging tool.
  8. Great way to practice trading strategies and making complex trades with minimum risk.
  9. You can set 'Automatic Stops'.
  10. 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.

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.



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