One of the key advantages of spread betting is leverage: you can trade with a lot more than you deposit. So with £20,000 you could actually gain exposure to nearly £200,000, if you wanted
Spread trading can be described as a short-term 'financial trading tool'. It is essentially short term and you can trade indices such as the FTSE 100, 250, the Dow - Jones, the S&P 500, the CAC, the DAX as well as currencies or commodities (such as gold or oil) and so on. It can be very exciting, and quite often it requires nerve and a cool head. It is not suited to everyone. Investors, as opposed to traders, who take a longer view and who prefer not to deal very often will not find spread betting attractive. However, there are many attractions attached to financial spread betting, and more and more people are using this rewarding form of investment. The two main ones are that you need very little capital although you can make a lot of money from betting successfully, and all winnings are completely free from tax. If you want to be a consistent winner there are some golden rules for you to learn. You must be able to read the signals that the market is showing you, and you must discipline yourself to bet only when the risk / reward ratios are in your favour. It can be great fun, and very profitable.
Spread betting, to conclude, is not suitable for long-term investment, or for placing your hopes, dreams, and life savings in, but can potentially be very profitable in the short term.
One of the key advantages of spread betting is leverage: you can trade with a lot more than you deposit. So with £20,000 you could actually gain exposure to nearly £200,000, if you wanted
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If you use the right tools, trade the right markets, apply discipline, protect your capital and try to learn from the good and bad trades then with practice you should make money. The spread betting company does not care whether you win or lose as they hedge most trades in the market. Their profit comes from the spread and it is in their interest that you at least breakeven over a period as you will then remain an active client. Current indicators are that a significant percentage of people using spread bets to trade will lose money. Take the time to learn the markets and techniques and be methodical and disciplined in your approach and be amongst the other percentage that actually makes money spread betting.
Let's assume, for the purpose of this exercise, that all the signals indicated that the FTSE 100 was very likely to rise in the next day or two. You would contact your financial trading broker to find out what prices they were quoting to 'Buy' the FTSE. (A 'Buy' signal is when the market is expected to rise, conversely a 'Sell' signal is when the market is expected to fall). They will quote two prices, a lower price to 'Sell' and a higher price to 'Buy'. You decide that you will trade £1.00 per point for every point the FTSE rises above your 'Buy' price. During that day the FTSE does rise and continues to rise the following day as well (each point the market rises, you have made a profit of £1.00). Lets assume that after the second day your data information signals indicate that the peak is likely to be reached very soon, so you now decide to 'Sell' and terminate your trade. Lets also assume - for the purpose of this example - that in total, the FTSE rose by 93 points - a profit of £93.00.
One of the main differences between spread betting and almost all other forms of investing is its hands-on nature. Investors make all the decisions themselves when they place a spread bet, as they do with execution only share trading. And it looks set to stay that way. One reason why spread-betting accounts do not figure in managed portfolios is because under an FSA ruling providers cannot give advice on spread betting. That won't change for a long time. I think this is where CFDs and spread betting may start to drift apart. CFDs are allowed in SIPPs (self-invested personal pension schemes) and most stockbrokers will advise on CFD trades. Spread betting will always be for speculators who want to make their own decisions while CFDs will be the instrument stockbrokers will use. We know they are similar products, but because of that tax angle I think one will always fall under an execution-only environment and a CFD will be used more and more in advisory and discretionary trading.' So if you have a spare £20,000, you effectively have £200,000 to play with in this market. But, as always, diversity is the key. And if you want to use £20,000 in the spread-betting arena all you really need is £2,000 and a clear strategy. |
Of course, the level at which you enter the market is up to you. You could for example choose to trade, say £10.00 per point. Using the same profit as above, that's 93 points X £10.00 = £930, or 93 points X £20 = £1860 or 93 points X £50 = £4,650. That's not too bad for two telephone calls and a few calculations is it? Of course, if your indicators predicted the markets to fall, you would instruct your broker to 'Sell' the FTSE and the same principle applies as in the above example but in reverse, i.e. The further the market fell, the higher your profit would be.
The above scenario is not unusual, in just one day in March 2002 the DOW index rose by over 200 points, another example in April 2002 saw the German DAX index fall by over 100 points in just a few hours. In May 2002 the FTSE index fell 65 points during an afternoon's trading. July 2002 saw the French CAC index fall over 400 points in just 4 days. More recently, in January 2003, the DOW fell over 700 points in just six days and in March 2003, the DAX rose by more than 300 points in just a few days.
Spread betting, as such, is not new. Financial Spread Betting has been in the UK for almost 30 years. Spread betting evolved in the mid-1970s when a British sports bookmaker devised an esoteric, high-risk means of gambling on the future of market indices that in time became popular on sporting events too. The advent of small investors in the stock market has fired the current boom in financial spread betting. Today 80 per cent of all financial spread betters are ordinary retail investors and bets can be made on the future movements of just about any indicator including indices, share prices, currencies and commodities.
Some prefer to call the stock market version "spread trading" because - once you have learned how to trade - you use your knowledge, skills and experience in order to reach your trading decisions, just as if you were trading in the traditional manner. It is not gambling at all, but it is called "betting" in order to use current UK legislation and thereby avoid UK income tax and capital gains tax on profits.
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