A: Many people are warned against spread betting as being too risky and this is certainly the case when there is a lack of understanding of how spread betting works and how it can make money for you.
However, spread betting is not inherently any more or less risky than buying shares. If you use the implied leverage, yes it gives you exposure to amplified losses/wins, but if you merely put the rest of the cash which would have otherwise been spent fully acquiring the stock in the bank, there is little difference.
Its reputation for being for "chancers" comes from a variety of sources:
1. It's called spread betting.
2. It also takes commission away from the traditional stock brokerages and so they are quick to point out how many people are losers. But do you see any winners in buy and hold since Dec 1999? Not many.
3. The first spread betters understood the lack of stamp duty meant active traders would find spread betting attractive as an alternative to direct share trading. They therefore set up bets for the day, which further encouraged short term speculation. This attracted all sorts of opportunists looking to make a quick buck, many of whom were destined to fail, simply because, contrary to popular opinion, short term trading is much more a game of skill than long term position holding is.
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And a word about gambling in general. I have had two serious injuries in my life. One could have confined me to a wheelchair as a tetraplegic, the other could have seen me contract MRSA. Both were sustained doing everyday things: driving (as a passenger) and making a pot of tea. I have however never suffered a single injury from either my skiing or mountain biking activities despite being a bit of a nutcase. In this respect I should point out that the safe often turns out to be more dangerous largely because you think it to be safe.
In actual fact, not only is getting out of bed in the morning risky, but, as sufferers of bed sores and dvt will tell you, so is staying under the covers.
A: This is just where your psychology towards spreadbetting is wrong, just view spread betting as another tool in the trader's armoury, you should enter or exit a trade for the same reason you would enter any other trade, whether it be a spread bet a normal trade a covered warrant or anything for that matter. anything.
When buying a share or spread bet for that matter this is how you should view it: I bought it because of A and I will sell it when B happens, if B doesn't happen you stay in the trade until you hit a target, at which time you might want to reassess, obviously the parameters of A and B are something that you set, but it does seem a common problem - some people are able to trade shares well but lose at spreadbetting. Maybe it would help to think of it as spread trading, the betting work may be having a Derren Brown effect on the way you see the trade!
For instance mostly I adhere to the 2% risk limit rule per trade on my normal shareholdings. I use a similar strategy for spread bets, but I include shares, spread betting and other investments in my total pot. I mostly bet on equities and treat every spread bet as if I'd purchased the shares - i.e. each £10 bet on 100p is like buying 1K worth of shares. That's how I record it in my accounting and my ShareScope portfolios. Thus I can mentally view the +/- figures on my spread betting account no differently than those I see against my SelfTrade or E*TRADE holdings, because I deal in similar quantities regardless of buying or betting.
Trading the FTSE is similar to trading a stock with a share price of 5000p. Apply just £1 per point needs to be backed by £5000 capital - £10 per point needs backing of £50,000. Without adopting this risk limit I found it impossible to trade emotion free intraday or end of day.
Edit. It also highlights the maximum risk to capital. It you draw a line and say I'm not prepared to lose more than 1% of my capital on any single trade a pot of just £50000 would mean your maximum stop loss would be at -£500. Personally I think that is more than enough without getting emotionally fraught.
I also make sure that spread betting leverage is backed by cash or other asset classes - money I can afford to lose and all that. The size of the spread bet account is now irrelevant. Have I got enough deposit to buy into the next share that comes onto the radar is all that matters :-)
A: I run my own trading accounts via spreadbetting and CFDs, I would disagree with the notion that spreadbetting is for scalping as the spreads really aren't tight enough to scalp equities...with CFDs this may be possible.
I like using spreadbetting on futures contracts for FTSE 350 companies as I am generally looking for stocks that are liquid (tight spreads) but also able grow >15% (there is a lot). My timeframe for equities is 2 -10 weeks, and then short term trades on currencies, commodities, indices...etc.
I would recommend spreadbetting/CFDs, but would consider them more of a trader's tool.
As regards people image that spreadbetting/CFDs are very risky, I disagree. Yes they are leveraged products, and Yes (!) you COULD lose more money than what is in your account, but they are best when used in a proper trading setup, with proper money management rules. e.g. when you have worked out ABC plc 1) target 2) stop loss and hence 3) risk-reward ratio, and 4) the amount of your account you are willing to risk e.g. 5%...you can work out how many shares to buy/bet.
Just because you can buy 33 times the amount of shares you can afford doesn't mean you should! Trading is about discipline! For someone new to trading I believe its better to learn about markets by holding shares before you move into spreadbetting as people can start to panic when big losses come up. It's all about psychology and keeping your nerve at times.
I am more of a trader and hence why I like to use more shorter term long/short derivatives rather than holding physical stock.
To conclude -:
A: I totally disagree with your opinion regarding spread betting, on the other hand I think it's a fantastic tool for traders which can be used for hedging your positions and playing commodities and best of all taking advantage of making some tax free gains, the problem with it is that it attracts people who don't have the necessary margin which is why they get into trouble, but for the more serious investor it's absolutely fantastic!
Zero paperwork. Zero tax. (Yes! I know it's not actually zero, as the bookie gets taxed on profit and that profit arises from within the quoted spread, which also includes the stamp duty on their underlying trade if they make one and is included even if they don't!). Which is presumably the case when they match off longs versus shorts and only hedge the unmatched bets - so by accepting their spread I am indirectly paying the bookie's tax bill - but it doesn't hurt really.
Spread betting is the same as trading shares, you are attempting to make money and make yourself better off than what you were before you started. It's as simple and as complicated as that.
It is legal, requires skill, knowledge, luck and a healthy load of cash. If you are good at it, the very best of luck to you and congratulations on your success. If you aren't, and you are losing money, perhaps you simply shouldn't do it.
As for the notion that 'real' investors (i.e. buyers of shares) are loyally (and piously) putting money into the company for the company's benefit while we speculative gamblers are not -- phooey! The vast majority of investors buy 'second hand' stock - not new stock.
If I buy a newly made product from its maker, the maker gets my money. If I subsequently sell the product on, that next buyer isn't giving money to the company that made the item; he's giving it to me. It's only the first buyer of the product who hands cash to the company. Thereafter the product gets passed from owner to owner and so does whatever money is involved. Same with shares. The first buyer puts money into the company - subsequent buyers of those shares once they are in circulation are merely passing them around among themselves and paying each other (and the tax man and broker each time), not putting additional money into the company.
Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)
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