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.
Key benefits linked with CFDs/spread betting by investors -:
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.
Spreadbetting for Active Traders
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:
- Massive Stamp Duty Savings
- Fastest Execution: because you are not physically buying or selling the stock the broker is not slowed down by having to step into the market and execute that trade for you. This will mean that typical execution times are higher than with a conventional broker
- Increased Liquidity: if the trades are not being executed directly into the market then Spread Bets increase the amount of stock available for everyone, making for a healthier market as a whole. It also means that if you are trading off charts then the fact that there may only be a few thousand shares available in the real market at your required price becomes much less of a problem.
How do you see most of your clients trading? Are they day traders, are they trading over a few days are longer term? It depends which markets they’re interested in. If they’re in equity market shares, they tend to be longer-term traders because the individual shares don’t move that much, especially in the UK. At the moment our biggest market by far is currency – more than half our trades every day – and here people are generally very short-term, in and out all the time. People like to trade in markets that move. – Spread Betting Insider
Spreadbetting for Short Term Traders
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:
- Low deposit requirements – freeing up huge amounts of capital for other trades or investments.
- Low commission levels – important for everyone really but this is probably the most significant cost for you.
Spreadbetting for Investors
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.
- Low costs of entry and exit.
- Hedging strategies – allows a long term holding to be managed in a mature fashion through the market movements, which will occur over the time span of the holding. Selling short during a long down trend will allow you to profit from the fall as well as reduce your exposure and increasing your exposure in an up trend will create much higher returns.
- Tax management – this is an arrear to be discussed with your broker and accountant but CFDs are an important tool in the absence of Bed & Breakfasting in order to control your tax exposures and utilise your Government allowances.
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.’
What can you Spread Bet On?
- Stock indices (FTSE, DAX, DOW, CAC, S&P)
- Single shares (US, UK, European)
- Commodities (gold, silver, oil)
- Bonds (Bund, Gilt, BOBL, JGB)
- Other products (property prices, weather, interest rates).
- Special interests (how many sips of water the Treasurer Gordon Brown will drink while announcing the Budget!!).
- Sports
In most cases, there are two prices quoted for each product:
- Daily or Intraday Bets – for bets that expire at the end of the day. Again, you can close this anytime before the day ends or roll it over to another day.
- Quarterly Bets – for bets that expire at the next quarterly expiry date. Again, you can close this anytime before the date or roll it over to the next quarterly date.
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.
Twenty years ago or so, most spread betting customers worked in the City. Now the 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.
