Isn't Spread Betting Risky and Unpatriotic!?

Q. But isn't this a bit like backing a horse, in that the odds are skewed so that the broker always wins?


A: This is a common fear amongst new investors but it is false as the price you pay depends on the price set by the market, and not the disposition of a bookmaker. Spread betting providers make their monies on the bid-offer spread and financing costs and not only on whether punters win or lose. Additionally, you can close your spreadbet at any time during market hours irrespective of whether your position is winning or losing.

Lastly, a spread bet, unlike fixed odds bet is not a 'win or lose everything' proposition as your returns will depend on how successful, or unsuccessful, your trade is - in most cases you will have the opportunity to close your bet before you lose your initial stake, but you could end up losing more as this is a leveraged trading product.

Q. I've always thought that spread betting was a fool's game - much too risky compared to shares dealing...

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.

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.

Don't regard spread betting as if it were simply financial gambling - margin trading can be a complex but useful financial tool if used responsibly and afforded the respect it deserves!

Q. It is too full of potential extremes which are simply not within your control at all...

A: Not really. Maybe it was the case years back - but in recent years the available facilities have changed a lot. It is nowadays possible to place 'limit orders' and take advantage of other risk management facilities which can eliminate extremes and/or balance them out [by hedging with opposing bets etc - and/or by automated phased reduction of stakes, and the use of conditional orders which activate themselves when anticipated events (good or bad) occur].

The reckless player can still take ill-planned punts with no defence mechanisms in place and lose, of course. But as someone who treats it like a business, I find it quite manageable ;o).

Q. It unnerves me to think that I am working against a betting company...

I don't like following a price that is different to the market and it unnerves me to think that I am working against a betting company. Once I have opened a bet I feel bad and want to close it, often taking a small profit or a loss. I just don't feel in control.

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 Saxobank 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 £50,000 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 :-)

Q. Regarding using spread betting I was under the impression that it was a bit of a risky game in terms of being able to lose more than you put in - as far as I am aware it is also for shorter term investing/scalping, please correct me if I am wrong.

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. 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 -:

  1. Spreadbetting/CFDs are not that risky if used properly.
  2. Spreadbetting/CFDs allow you to gain experience in a broad range of markets at cheap transaction costs.
  3. If it is trading/ short term investing you are after then they are useful.
  4. They should not be used for long term investing.

Q. Spread-betting is unpatriotic, harmful to all quoted businesses and works against the interests of UK financial institutions...

No doubt your research has already established that spread-betting is unpatriotic, harmful to all quoted businesses and works against the interests of UK financial institutions, pension funds and the majority of hard-working ordinary investors who actually buy shares in companies with their own hard-earned money. Sure, all stock markets are driven by greed - but ordinary investors' 'greed' really is good. If nothing, they commit their cash to the companies in which they invest. Spreadbetters' greed, on the other hand, acts like a giant lever - crushing enterprise and - in any financial crisis - multiplying and magnifying the negative effects....

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.

Q. Doesn't betting on shares leave firms at the mercy of insiders?

A: Perhaps naively, I asked the staff at IG Index whether betting on shares didn't leave them at the mercy of investors armed with inside information. 'Sometimes we do get caught out', replied a senior figure, 'but most of the time clients trading on information generally know less than they think they do.'

I guess that's a clear way of saying that markets are broadly efficient and that share prices tend to be quite accurate. So if you do decide to trade on information, make sure it's good information, not old news already discounted in the price.

Rather than reacting to stories, perhaps a more sensible approach is to go back to basics and study the businesses themselves. In fact quite a number of firms listed amongst the top 350 companies in London are household names which we often interact with. Sometimes we work for these companies or do business with them, or our family or friends do.

 ...Continues here - Odds of Winning and Successful Spread Betters

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