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.
Brought to you in association with MoneyAm Shares Magazine
