You might have already experienced buying and selling shares through a traditional stockbroker. But what if you could access more markets and have more investment choice? What if you had the potential of being able to profit in any market condition while initially paying only part of the full market value of the deal? What if there was no separate commission and everything was built into a narrow spread?
Everyone is attracted to the idea of making money out of backing their judgment, particularly when they see an anomalous situation which they think will be corrected, or when they spot a share price trend and want to cash in on it by riding the rise or fall so long as it lasts. Spread betting allows you to do this very efficiently without the need for access to large amounts of capital.
One of the most important aspects of financial spread betting, and one that is no longer available to the ordinary investor in stocks and shares, is that you can make money from a falling share or commodity price in just the same way that you can win from a rising one. Financial spread betters are just as happy operating in a falling market, when all conventional investors who hold equities or commodities in their portfolios are getting more and more depressed because they are watching the values of their investments diminishing all the time. If they have to liquidate any holdings, they will either get a smaller profit, or an outright loss. However, the spread better will be able to take full advantage of falling prices and make as much money as they fall as they would when they rise. Furthermore, the spread better is able to make a whole lot more money out of the same share if the price turns and climbs back to where it was previously, whilst the holder of the same share can only watch the recovery, if it happens, and sigh with relief.
Essentially, financial spread betting is short term trading, as opposed to longer term investing, as well as being an adjunct to investing over a longer period. It can also be used very effectively to protect profits that have been achieved in the core holdings of a portfolio.
There is another aspect to financial spread betting that has come about more or less by accident. The imposition of massive regulation upon stockbrokers and institutions which are licensed to deal in investments on a regulated investment exchange brings greatly increased costs which are passed on to the client. Government stamp duty, dealing commissions both when you buy as well as when you sell which can vary in amount considerably between firms of stockbrokers and banks, and of course, the iniquitous capital gains tax, have all combined to make short term trading unattractive if you have to try to make money by buying and selling individual shares. None of these costs apply when you engage in financial spread betting. There is no capital gains tax to pay when you win. Of course the corollary applies; you cannot offset losses against gains, either from spread betting or any other investment activity. Nevertheless, by the judicial use of stop-loss limits, you should be able to ensure that your gains far outweigh any losses that might arise.
All investments carry a degree of risk, some greater than others. Financial spread betting is at the high end of the risk table in that, theoretically, your losses are unlimited, but there are several things that you can do to minimize the degree of risk, and at the same time control your exposure to actual loss. In fact you should not get involved in such financial short term trading activities unless you are prepared to follow the simple and obvious rules of common sense that govern such activities.
Firstly, you must always apply guaranteed stop-loss limits to your bets, regardless of the additional cost of provision of this safety factor. In certain circumstances, without such protection, the very real potential loss can be an infinite amount of money. Secondly, you must really know as much as possible about the company or commodity upon which you are going to place your bet. You should become an expert in your chosen sector, and stick closely to what you know. Be persuaded to open or close a bet by your own judgment, rather than relying on a 'tip in the pub'.
Thirdly, monitor your bets all the time that they are running - events that can have a dramatic effect on your open positions can happen very fast and without warning. Finally, you must be prepared to cut any losses without emotion getting involved. If you follow these rules you can reduce the degree of risk substantially.
The main problem with spread betting is that people see how quickly money can be made, they get a taste of it and imagine an easy life, trading for a living and being a big swinging dick, the reality is that it takes hours sitting in front of a monitor and is on the whole pretty soul destroying when you are not in a winning position.
Not everyone is suited temperamentally to financial spread betting. This is not so much the case for sports spread betting, probably because the potential amount of monetary loss is considerably smaller in most sports (other than cricket or rugby union perhaps) and such betting is generally regarded as somewhat more frivolous than as being a full time occupation.
Financial spread betting does require a degree of nerve and courage, as well as the ability to accept losses without it affecting your judgment in the same way that players in high stakes poker games must remain aloof from emotional involvement when play goes against them. This state of mind is essential if you want to be able to continue to calculate dispassionately the odds against winning or losing as circumstances change at speed.
You need to open an account with a financial spread betting provider. Generally the larger firms will offer facilities to place sporting bets also. All have to supply you with full details of their terms and conditions before they can accept any bets from you. They will want to know how much money you will want to stake normally, and they will ask for a deposit to be placed with them. This sum usually will be around £2,000 and they should pay interest to you whilst it is kept in their clients' account.
It will pay you to get to know an individual dealer with whom you transact your business because the relationship that you can build may be beneficial to you both. Trading with bookmakers tends to be rapid, since they have got a large number of clients and cannot afford to spend a lot of time discussing any particular bet. They are not there to give advice; you are supposed to understand the language and how it all works, but usually they will try to help those who tell them that they are beginners.
Remember that all telephone conversations with bookmakers are recorded, and this is very much to your advantage because if you dispute any verbal instruction that you may have given to the bookmaker, you are always able to demand to listen to the tape of the original telephone call. Make sure that you fully understand all the terms and conditions as well as settlement terms at the beginning of your relationship before you start to place your first bets.
With thanks to veteran stockbroker and spreadbetting guru Charles Vintcent who contributed in part to this article. Charles is the author of the best-seller, How to Make Money from Financial Spread Betting.
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