While spread betting, contract for difference (CFD) trading, and binary betting get quite a lot of press, we estimate that there are currently only 125,000 active financial bettors (the Telegraph estimates this number to be closer to 183,000), and 425,000 individuals with financial betting accounts globally - 90% of whom are based in the UK. However, we estimate that financial betting will experience explosive growth in Asia, and CFD trading, in particular, will become much more common in continental Europe. Typically CFD or spread betting clients tend to be quite active - trading 4-5 times more frequently than with a traditional broker. Also, due to the margining affect, the average trade size is also significantly higher than trading the underlying investment.
The ability to take short positions, leveraged exposure and tax benefits are the main factors that have pulled traders and investors towards CFDs/spread betting platforms in the past. Some also like the opportunity to manage one's own money directly.
Active traders can be anyone from the big day trader, turning over tens of trades a day to the trader who takes the odd punt once or twice a week. Anyone falling into this category will benefit mostly from these three aspects of spreadbetting:
The short-term trader is typically the person who is not looking to 'job' their position out from the moment they create it. Sometimes called 'swing' or 'momentum' traders these days, you are someone who takes advantage of value plays, news events or longer term chart trends, as such you have a slightly different series of requirements from the faster trader:
This is the third type of Spread Bet user and on the surface will appear to be the most unlikely, but it is important to recall that Spread Bets were originally created as a hedging tool for the investor and not the trader and is still used as such, along with other features which make it an invaluable tool for the investor to have at his disposal.
One investor recently pointed out to me: 'Like a lot of people I'm growing tired of 'experts' managing funds which have lost big sums of money over the past few years. I have started reading some great material on investing and financial spread betting and am looking forward to the day when I can successfully look after my investments knowing that if anything goes wrong it'll be my fault, not the fund managers who took a cut of the initial investment in the form of fees and still lost money.'
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For example the FTSE - Daily may be quoted at 4306 - 4310 while the FTSE - 16 Sep '04 may be quoted at 4312 - 4318 points
Most spread betters tend to prefer to trade during UK market hours. As Josh Raymond market strategist at City Index puts it 'Our busiest periods are 7am to 9am when people are on their way to work and 4pm to 6pm when they get back in the evening. We also see a pick up in activity when the US economic data comes out early in the afternoon.'
A survey covering different aspects of CFD and spread betting instruments was sent to more than 1000 people in 2014. Some interesting facts emerged about the preferences of traders and investors. Most active traders utilising leverage with contracts for difference and/or spread betting have an experience ranging between 1-5 years. Most are buy and hold investors while some utilise shorting strategies with many preferring to hold positions for 1-5 days or even greater. The majority of investors prefer leverage levels of 2x - 5x with leverage levels of 10x - 20x being much less common. Many tend to trade the FTSE followed closely by individual shares. Less than half of the survey respondents deal in USA markets based indices like S&P500 (35%), FX (28%), commodities (24%), other ex-UK European indices like DAX (24%) and Asian markets (21%).
A substantial 38% of respondents utilise leveraging strategies on a frequent basis while 29% of respondents make use of 1-5 days and greater than 5 days trading strategies. Intraday trading seems to be less popular with only 21% of the respondents using it frequently. A small slice of the survey pool (4%) employ other strategies like automated strategies - signal following.
Respondents are close to evenly split over the average holding period for a position in the past year. Traders who have holding periods of 1-5 days and greater than 5 days constitute 46% of the respondents each while intraday traders along with traders having other holding periods (like greater than 30 days) constitute 4% of the respondents each.
About half of survey participants (48%) stated that they utilise a 5x leverage factor for shares while a substantial 35% reported average leverage factors in the 2x range. A further 13% of those surveyed had high average leverage factors (10x) and a small slice (4%) had even higher average leverage factors in the range of 10-20x.
As far as provider risks are concerned, the financial stability of the spread betting or CFD provider ranks at the top (40%). This is followed by a number of other reasons such as wide spreads, client money vs firm money risks and liquidity (15% each). A further 10% are concerned by price discovery in open markets and other issues include the inability to spread bet while working in financial markets.
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