 |
Jones, Shares: Most readers will have heard the term but some will not know exactly what it is - how would you best describe a spread bet?
Patrick Latchford, Finspreads: Exactly what it says - it's a bet, in this case on a financial market. At its most trivial, it can be light amusement; at its most serious it can be a financial instrument you can use as part of a portfolio of products for investing in the market.
Jones: What sort of markets can I trade if I have a spread-betting account?
Geoff Langham, CMC Markets, CMC: Basically, whatever the spread-betting company wants to offer. At CMC Markets, we treat it as a serious financial product so we only offer securities such as shares and indices, commodities, treasuries and foreign exchange.
Jones: Most of our readers are going to be interested in shares. Let's say I'm looking at the share price of BP and it's 504p to sell and 505p to buy. How do you decide what price the spread bet is going to be?
Dan Moczulski, IG Index: It depends on the contract. If you go for what's commonly referred to as a daily share or rolling cash share, typically it's whatever you see in the market. It's somewhat different when you're referring to futures contracts.
A spread bet generally has a time-frame attached to it, so when we make a price we have to factor this in. If you are looking at the FTSE or commodities, it's easily done as we can follow the futures market, but for shares it's somewhat different. We have to make the price synthetically by using what's referred to as 'cost of carry'. This is simply a calculation of the interest that borrowing at 505p, say, would incur over the period of the bet minus the dividends that the company may pay out, and then we put our spread round it. That is how we make a price. It's not a judgement on where the market is going, it's not a view or anything like that - just a simple replication of the share price plus interest minus dividends.
Jones: Let's talk about the different spread bets that are available. A few years ago, the bets had quarterly expiry so we had March, June, September and December spread bets. If we want to, we can still do a BP December spread bet, for example. As an individual private investor, is there a particular sort of spread bet I should be doing? Should I be doing quarterly bets or daily rolling cash-type bets, for example?
Ian Jenkins, Cantor Index: It's up to the client. Everyone has a different view - a different perception of the markets. Whether you take a December, a March, a weekly or a daily, essentially you need the share to move for you to make money. The sophistication of clients in this industry is growing, so the products are becoming more bespoke.
Jones: Is it fair to say the spread-bet price will near enough mirror the underlying share?
Ian Jenkins, Cantor Index: By and large, yes.
Dan Moczulski, IG Index: It's worth pointing out that not only will it mimic the share price in terms of the absolute level of the spread bet, it will also move with the price. If the share price moves 50p, the spread bet moves by 50p.
Jones: I think this is something that confuses people who haven't done spread betting before. They get confused into thinking it works in a similar way to options.
Patrick Latchford, Finspreads: The point is December FTSE or December BP or March BP isn't where Cantor or whoever think BP is going to be in March - it's a calculation that produces that figure. People need to understand there's a science to it.
Tom Hougaard, City Index: I think the biggest misconception about spread betting is that we have got anything to do with betting - you couldn't be any further from a bet. City Index is unfortunately forced to call itself a spread-betting company, but by no means are we like a bookmaker where you bet on Thin Lizzie in the 3 o'clock at Cheltenham. We supply retail investors with a vehicle - the tool by which they can trade the markets. Unfortunately we have to call ourselves a betting company because of the tax legislation. People trading through a spread-betting company are trading the underlying market and the spread is where we make our money, but they're not betting. You don't bet on the financial markets - you take a view, you speculate.
Jones: Another point is that your prices are not a prediction of where the market is going to be. It's a common problem when people start spread betting the Dow or the FTSE, for example. They look at their screens and see the FTSE at 4550, then look to the spread betters who might be the FTSE December at 4580, and they wonder why there's a difference.
Dan Moczulski, IG Index: What's important to realise is how all firms hedge their positions. We have to hedge in the most liquid market that we can see. Equally, we're trying to make a price that's instant execution-only, 24 hours a day, and we need to be able to respond to the most liquid markets.
The FTSE 100 index is just a number. People refer to trading the FTSE itself but you can't actually do this - you can only trade the futures. So the way that we make a daily price is by looking at the futures first and then bringing it back, removing the interest rates and adding the dividends.
With shares we can't do that. There is a futures market but it's incredibly illiquid and it only covers a small range of shares, so we take the share price as it is, plus the interest and minus the dividends. It's simply a spreadsheet that is calculating this - it's not as if someone at IG has hung over a screen working out what they think will happen. If we felt that we knew which way the market was going better than anyone else we'd be the world's greatest fund managers. We're simply producing a price based on the mechanics of dealing this as a futures trade rather than a trade here and now.
Ian Jenkins, Cantor Index: It's up to the clients to educate themselves here, I think. It's very easy just coming in saying, 'I've traded shares, it must be the same'. They must understand this cost of funding, because it is such an integral part of any type of futures trading.
Jones: This is all linked to the fact that spread betting is on margin, which is an important consideration for private investors.
Tom Hougaard, City Index: You say it's for clients to educate themselves but I think every spread better here runs courses. We try to educate our clients about how these things work, what risk they have, what kind of exposure they are subjecting themselves to in the market. Bookmakers want their clients to lose: is there anyone in here who does not want their clients to win? Of course not.
Jones: Let's say I'm a private investor who has been buying shares for the last two or three years, making one or two purchases a month. I know there's this thing out there called spread betting but, why is it relevant to me?
Patrick Latchford, Finspreads: Generally, retail investors have got to think in a much broader sense about how they're going to get some kind of return on their investment portfolios. The days when you're going to make a lot of money sitting on long-only equity positions are probably gone.
For example, it may be the shares you hold have serious short-term improvements but you feel they will probably come back down. You have an opportunity using a spread bet to take advantage of that short-term profitability without selling your underlying share position. You don't have to sell the shares, take a small profit, wait for them to move, buy them again and waste good money on costs. With a spread bet you can lock in some profit in the shortterm while maintaining your core holding.
 |
Brought to you in association with MoneyAm Shares Magazine
