My Adventure in Spread Betting
My Adventure in Spread Betting
My latest post looks at a new way to trade. I’ll say it right now: this method of trading will not be for everyone. Like most investing methods, you can lose a lot of money if you don’t do due diligence to your research
Interest seemed to have peaked during the global financial crisis, where people lost (and made) a lot of money in just a few seconds. Like many of you, I have been fascinated by the rise of spread betting over the years. Spread betting companies themselves appeared to benefit from this volatility – and I always wondered why that was the case.
Some of the spread betting wins in years gone by have been legendary. The London Evening Standard ran a great feature on some of the biggest results in the last ten years or so, with my favourite being the story of the trader who came in, made £1.1 million trading the DAX, and left without trading again.
Of course, spread betting has not been without its chagrin: the infamous UBS rogue trader who lost over $2 billion from the banks coffers reportedly used spread betting as his trading tactic of choice. So, for all of you wondering, here is a run-down of how spread betting works.
How does spread betting work
Spread betting allows you to trade on the financial markets. Where it differs from many conventional trading methods is that you can both trade on margin and trade on whether a market will go up or down in value.
Trading on margin means that you can open a position with a much smaller deposit than you would need normally. For instance, if you wanted to buy 10,000 shares at 10p per share, rather than parting with £1,000, trading on a 10% margin means that you only need to put down £100 to get access to that position. This is a great way to get access to the financial markets, although it’s not without its pitfalls: trading on margin can result in losses that exceed your initial deposit (£100 in this example), so trade carefully.
My favourite spread betting benefit, however, has to be the fact that you can trade on both a rising and falling market. Sticking with shares, traditionally you can only stand to profit if you buy the shares and they go up in value. However, with spread betting, you can ‘short’ shares or other markets like forex, giving you the chance to potentially profit from that market movement too. In times of economic uncertainty, this can be a really valuable tool to have.
This image helps to explain spread betting pretty well:
Some of the other benefits of spread betting include the tax element. Currently (and this is just the UK I’m talking about) profits on spread betting are exempt from stamp duty and are also tax-free, if they are not your main source of income. This legislation could change in the future, but right now I think it’s a very attractive benefit.
Most spread betting companies provide a wide range of markets. If you can find one that provides over 50 currency pairs and most of the shares of the companies listed on the FTSE 250, odds are you’ve found a reputable provider. In addition, most companies only charge the spread on the trades – which means spread betting can be commission-free.
Did I find spread betting right for me?
One of the most important things to remember when spread betting is that you are using a market maker service. In essence, your trades are placed on a market that corresponds with the real underlying markets. This means that your trades won’t physically be on the market, so your trades may not dictate market movement.
Sceptics out there think that market maker services leave the trader open to broker abuse. Not in the sense of the UBS scandal abuse (which you can read about here), but in the sense that the broker places the odds against the trader. People have complained about slippage and plugins playing the market in the broker’s favour. I can’t say that I’ve seen this first-hand and I also don’t think that successful spread betting brokers would be around for much longer if this was common practice. However, it’s definitely something worth considering if this is the kind of trading for you.
For me, I find spread betting particularly useful as I have quite a large share portfolio. Now obviously, since the economic downturn, some of these shares have seen their value fluctuate wildly. A lot of them I think are sound investments in the long run and so I’ll want to keep hold of them, even if they lose value. Just in case they don’t appreciate back up in value, however, it’s a good idea to hedge against my investment and spread betting provides a perfect opportunity to do this. I can hold my shares for the long-term, but if there’s any short-term loss in value, I can use spread betting to ‘short’ the shares and potentially pick up some profit to their loss in value.
That’s just the way I’ll be using spread betting in the future, but it is a legitimate way to trade outright. As with all investing, it really does pay to have an in-depth knowledge of the financial markets before you invest, so make sure you read up on every bit of news and resource you can muster.
Trade with caution but trade to win.
After this post went live, a number of people have got in contact me asking who I was spread betting with so I though I’d do a follow up post.
First of all, I’ve tried a lot of different providers. I think it’s important that you go with a number of providers first, as they all offer different spread betting platforms, market ranges, spreads and so on. You’ll also get a feel for what their customer service and support is like, which I think is in important factor when choosing the right provider.
The spread betting provider that I was consistently impressed with was ETX Capital and not least because of their extensive education system and ‘what is spread betting’ support pages. The account was free to open and literally within minutes I had a call from my account manager, who ran me through the features of the platform and the seminar and webinar systems as I mentioned.
Customer support might be important to me, but for you it could be something different. Spreads are often a contentious issue in the industry, so naturally we’d all like the tightest spread possible. Tightest, however, does not always mean cheapest. A lot of the announced spreads by spread betting providers are not fixed, meaning that the spread could widen – often at critical market moments. I’d rather pick a provider that offers fixed spreads during market hours. They might initially look more expensive, but more often than note, when I go to make a trade, not only are they cheaper but I have a guaranteed spread. That makes the difference for me.
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