Today's private investor can access an incredible variety of markets including spread betting, binary bets, CFDs and futures trading. But what exactly is on offer, and how they do these products work? Shares gathered four experts around a table from market leading companies and asked them to explain what's on offer
Mike Boydell, Shares and MoneyAM: What is your company's main activity?
Lance Farrant, GNI Touch: Our department within the Man group supplies online trading solutions for FX, futures and CFDs. We are the leading institution in delivering all aspects of financial services to a vast range of clients, from the largest hedge funds to private individuals. We are the biggest online brokerage firm in the world.
David Morrison, Man Spread Trading: Financial spread betting.
Jon Scott, E*TRADE Financial: We are one of the leading global online brokers with more than four million accounts. In the UK we offer a comprehensive service: CFDs, Forex, Futures, Spreadbetting and UK and US Equities.
Boydell: In a nutshell, how does your particular product - ie the one you are here to talk about today - work?
Moczulski: I'm representing binarybet.com, and therefore binaries. I think that binaries are unique in terms of the products we are talking about today, in that they are fairly new, and reasonably unique to IG, which isn't so much of a surprise given IG invented them
Essentially they are a cross between a spread bet and a fixed-odds trade. We resolve any event into two outcomes - either something does happen or it doesn't. We subscribe the number 100 if it does and zero if it doesn't. So for example, 'will the FTSE finish up today?' only has two outcomes. At any time until the eventual outcome www.binarybet.com will produce a buying price and a selling price which illustrate the probabilities. Say the FTSE was unchanged and there is a 50% chance of it finishing up and a 50% finishing down, we could be pricing 49/51. If you buy at 51 and it does finish up you make 49 points. If it doesn't and ends down you lose 51 points
Taking it further, we then have binaries such as 'will the Dow finish up between 50 and 60 ?' or 'will the NASDAQ touch 1800?'. You could make money if you agree, or disagree. Although this can sound quite scary, binaries are unique among the products we are speaking about today in that the outcome can not be worse than zero, so the product is a completely limited risk.
Farrant: We supply an internet-based trading platform which allows a client to trade streamed spot prices in 20 currency pairs and direct market access on all the main futures exchanges. On the futures we offer access to all tradable exchanges via all leading ISVs and the functionality that they in turn offer.
Scott: CFDs, or contracts for difference, are an over-the-counter product. It mimics the price of the underlying instrument without you taking any physical ownership. The main benefit is the ability to short, allowing investors to take advantage of rising or falling market. Let's not forget CFDs are exempt from stamp duty.
Morrison: Spread betting is a tax efficient method of speculating on a huge variety of different financial markets. Because the spread betting company is a licensed bookmaker (as well as FSA registered) and effectively takes the opposite side of your trade, the transaction is treated as a bet and so you pay neither Capital Gains Tax on your winnings nor Stamp Duty mas you would with a broker. Rather than charging a commission, the spread betting company makes a two-way price, or spread. The client simply sells at the lower end or buys at the higher end and does the opposite to close the bet.
Boydell: What type of client and what type of uses are your particular products most suitable for?
Moczulski: From a sophisticated volatility trader to people whose only experience of the market is listening to a radio news report on the FTSE at the end of the day. However the two attributes that most people are looking for who trade binaries are short-term volatility and limited risk.
Scott: Because of the breadth of our offering we attract a wide range of customers, from complete beginners to active traders to small institutional firms.
Farrant: Professional traders, small funds and institutions use us for speculation and hedging risk exposure. We cater for all professional and retail clients in all asset classes, providing they meet the regulatory requirements for that category.
Morrison: The vast majority are private individuals rather than institutional clients. As there is no tax to pay, you can't offset any losses in spread betting against any other tax liability, so this isn't suitable for institutional clients. Ten years ago or so, most spread betting customers worked in the City. Now our client base is much more varied, and the only guaranteed common denominator is an interest in financial markets. People use spread betting to back their own judgement on the movement of individual shares and markets such as stock indices, currencies and commodities. They can go short as easily as going long, so spread betting is a cost-effective medium for hedging as well as speculating.
Boydell: What is the procedure for opening an account? How much do I need?
Scott: E*TRADE has a simple online application process for opening a new account. With as little as £3,000, you can start trading CFDs with us. But you can get trial the platform immediately, with our demo which enables you to do live simulated trades.
Moczulski: As I mentioned binaries are limited risk, and because of this it is incredible easy to open account. In fact I would recommend opening an account even if you have a moderate interest in them. There is a three-minute online form to fill in, no documents are required, and you instantly have an account. You are under no obligation to trade or even fund the account, but this way you can monitor the dealing prices to see whether binary trading is for you.
Farrant: Completion of account-opening documentation can be done online, and customers will need $10,000 or equivalent for FX and £10,000 for futures. Specific pricing and cost structures are formulated according to the client profile but we aim to always be extremely competitive for quality clients.
Morrison: Whether you apply directly online or by requesting a brochure you need to fill in our application form, which hopefully people find straightforward. If you apply online then we will open you a temporary account within 20 minutes, provided we can verify your address, which we do electronically.
Once funded, a temporary account will allow you to bet on any of our daily or rolling markets for up to two weeks. This means you have a cooling off period before committing to any longer-term bets. But as soon as we receive a signed copy of the original online application form, then we'll convert you to full-account status.
There are plenty of markets you can bet on with as little as £250 initial margin, but we suggest that people put up a minimum of £500 to start off with.
Boydell: What is the typical level of risk involved with your products? What is the potential risk and reward level?
Moczulski: There is no typical risk. Some people risk £10, some £10,000 - it all depends on the client. However due to the nature of the product people always know up front what they are risking. As it is limited risk there are no nasty surprises caused by a collapse of the Nikkei while you were asleep
At the start of each trade, you always know both outcomes. Let's say you buy 'FTSE to touch 5700?' binary at 23, and trade £1 a point. The very worst thing that can happen is that it doesn't hit 5700, and the bet ends at zero, at a loss of £23. If it does hit 5700, the bet ends at 100, making you £77.
Farrant: We offer 40x leverage - which is conservative but in the clients best interest - and exchange minimum initial margin on futures
Futures require approximately 20x leverage but the underlying minimums are set by the specific exchanges. For larger accounts we can allow half exchange mins for intraday trading. The margin structures can be tailored to specific clients and their trading styles according to the risk profile. In some instances can we can apply even more sophisticated risk management through our 'complex client' desk, which assesses cross-border and market exposure with a view of further reducing margin requirements. This tends to be appropriate for more sophisticated trading strategies.
Morrison: Spread betting is one of the more speculative financial products. It is a margined product, meaning that you only need to have a small percentage of the total value of the bet in your account in order to open a position, so for a small initial outlay, the rewards can be substantial. But the risks are also large: if the market moves against you, you will be asked for additional funds to keep the bet open. Risk management is key through the use of stop losses
Also, we offer guaranteed stops on many markets, where, for an additional charge, you can quantify any potential loss absolutely.
Scott: Because CFDs are a margined product, your exposure to the market exceeds your initial deposit, thus your potential risk and reward are magnified. Our customers can take advantage of our free seminars which educates them on the risks involved.
Boydell: How much experience do I need to have in traditional share trading before considering one of your products?
Moczulski: None. Binary betting is treated as a fixed odds product, so it has none of the requirement associated with derivative trading. However I do not suggest it is for everybody. Regardless of the risks and rewards, obviously you do not make money if your judgement is incorrect.
Scott: In general, we look for customers with at least six months trading experience.
Farrant: We require a minimum of one year's trading experience in related products to trade FX and futures. We vehemently impose the regulatory requirements on the basis that previous client knowledge and experience is extremely important. This ensures that new clients are fully aware of the risks involved in leveraged trading, in what can be extremely volatile markets.
Morrison: You don't need any prior experience in share dealing or any other type of trading to open an account and start spread betting. Our minimum bet sizes are usually much smaller than the minimum deal sizes offered by brokers - this means that you can get used to the financial markets while keeping your risk exposure low.
If you were new to these markets, then we would recommend that you start small and do as much homework as you can. However, if you are applying for credit, then we require at least six months spread betting experience.
Boydell: Having traded traditionally in shares for years, why might I be interested in progressing into a different type vehicle?
Moczulski: There are very few people who continue to invest with a buy and hold mentality. Increasingly those with an interest in financial markets are looking for capital growth, and not income, and so to profit they need volatility. Binaries produce volatility in the most sedate of markets. For example a trade on the FTSE can finish at zero if the FTSE finishes down by one point, but the same trade can finish at 100 if the FTSE finishes up by one point. So two points difference has created 100 points of volatility. While it will not replace all your methods of trading the attractions of such gearing combined with no dealing costs, no stamp duty, no tax and limited risk make binaries extremely attractive to both the seasoned professional trader and the newbie looking to understand markets.
Farrant: New exciting markets with competitive prices, news and charts all free of charge are now easily available. This trading in related markets allows clients to hedge against their underlying exposures. For example, a client that is long US bonds and short UK equities may want to neutralise the $/£ risk by trading FX, or hedge their underlying long in the equity market, maybe their pension fund, by selling 'high water marks' in the stock indices, such as FTSE futures.
Morrison: With a spread betting account you'll be able to trade many different financial instruments. But if you stick to spread betting on shares you'll be able to free up capital as you're trading on margin; you'll be able to go short as easily as long and you won't pay stamp duty or be liable for Capital Gains Tax. However, I think spread betting complements other trading vehicles - whether trading physical stocks, CFDs, currency futures or binaries.
I think everyone around this table has something interesting to offer for different traders in different situations.
Scott: New vehicles, such as CFDs, have many advantages such as shorting opportunities, trading on margin and not paying stamp duty. CFDs also have rolling time limits and can be held indefinitely.