Perhaps you're a seasoned stock market player tired of hefty commissions and tax eating into your investment gains, or maybe you're a novice investor intimidated by traditional stockbroking houses. Whatever the reason, you've decided to try your hand at spread betting, but where do you start?
The first step is getting to grips with the concept of spread betting. Jumping in head-first without a thorough understanding of exactly how this relatively new form of trading works is a recipe for disaster. Not surprisingly all of the spread betting firms in the market offer free tutorials - after all, they don't want customers blowing their life savings on their first trade.
So what is spread betting? Spread betting is a leveraged tool that gives the investor the opportunity to back their judgement on the direction of a financial market. Spread betting companies take the price of an underlying market and add a 'spread' to that price. The spread is the difference between the sell and buy price.
Step 1: Choose the right company for you.
Step 2: Open your account. Usually this can be done on the same day. Some firms will carry out credit checks on you and will require that you call them from a landline to verify your identity.
Step 3: Choose what you want to bet on. There is everything from indices, FX, commodities, shares to more complex financial products like ETFs and interest rates. Start on something that you feel comfortable betting on and understand how the market is traded. Is it on each decimal point or is it each point movement? If you are unsure call them up or look on their market information sheet.
Step 4: Do your research. Use the charting software provided by your spread betting firm, look on Bloomberg, Reuters etc and other reputable financial news websites to get a feel for the market. Wait for the right entry point and choose your exit points and stop loss level in advance.
Step 5: Place your trade. Do it over the phone or online. Online is instant execution and is good for day trading, but if you want to speak to the traders and get a 'feel' for the direction of the market on a futures trade call them up. Remember that the traders cannot give out advice - if you want advice, speak to an independent financial advisor.
For traders who wish to have a trial run before they put their money where their mouth is, it makes sense to start off by opening a simulator or demonstration account (one of the best ones is the Ayondo demo account), as this is a risk-free method of familiarizing yourself with the mechanics of spread betting. When choosing between the various firms in the market, one aspect that investors should factor into their decision is the spread - the difference between the buy and sell price - offered by the different companies as some can be significantly better value than others.
The first thing that strikes you when setting up a spread betting portfolio is that as soon as you make each trade you're immediately in a loss situation, due to the dealing spread. For example, if the spread offered on Ryanair is 501 - 507, this means that you can buy it for 507, but you're immediately down six points because you can only sell it for 501. It's only when the share price rises by six points that you will be able to sell at the price you bought, because the spread will have moved up by that amount. Therefore the share price must rise by the difference of the spread before you recoup your costs and can start making a profit. This is how the spread betting company makes its money.
The key message that is invariably impressed upon all rookie investors by spread-betting companies is the high-risk nature of the game they're getting themselves into. The money required to open a spread betting position is a small percentage of what would be required to invest in the underlying market outright.
For instance, having a flutter of £10 per point might not sound like a bit outlay, but it can be the same as owning thousands of shares in a company and the kind of exposure that requires customers of spread betting firms to put up four and five-figure deposits upfront.
Now, suppose a spread better places a stake of £10 on AIB at a price of £20.00. The exposure is for each point in the price meaning a £10 stake in AIB is the same as owning 20,000 AIB shares. If AIB's share price drops £1 - or 100 points - which it could do for little other reason than the market is having a bad day, then the spread better loses £10 multiplied by 100, or £1,000. In the unlikely but possible event that AIB's share price dramatically falls to £10.00, the loss on £10 per point stake will be £10,000.
According to Irish spread betting firm Delta Index, putting £10,000 into a spread betting account can allow customers to make trades equivalent to around £50,000-£100,000 of Irish shares or £500,000 worth of currencies. This means it is only really suitable for people who can afford to take a bit of a hit if their bet goes wrong. This is because while gains can be exponentially higher than the original stake , so too can the losses.
There is a useful way to avoid complete financial devastation however: using spread betting sites' stop loss facilities. Stop loss facilities do exactly what they imply, stopping the loss at a particular point and closing the trade. If a spread betting contract moves against the customer - rises instead of falls - by more than the value of the initial deposit, then the customer will owe the spread betting first additional money.
At Delta Index, customer can for example put their stop loss on the contract they are trading roughly 20 points away from their open position. Anything close and the 'noise of the markets', or the standard daily price fluctuations that aren't symptomatic of any great malaise with the stock, will trigger the stop loss and close the trade.
Customers can also change their stop loss, moving it up above the initial price so that they lock in a profit. For example, a spread better places a stake on CRH buying it at £33.00. They could set up an automatic stop loss at £31.00 on the basis that they're not prepared to risk any more money on the trade. Over the next few months CRH's share price moves up to £35. The spread better can move their stop loss up to £34, thus locking in a 100 point profit - on that trade at least.
A good way to started is to deposit £100, trade £1 a point and trade on things you know. You should also know at which level you will pick your profits or at what level you get out if the market moves against you even before getting into a spread trade.
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