Wealth

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What is……spread betting?

Let’s be totally clear about this. Spread betting is high risk. Unlike more traditional gambling where you only lose your stake money, profits and losses are potentially unlimited

But say you have a hunch that England will score lots of goals at Euro 2102. Or that the Japanese stock market will beat the US market this year. Or that the banking sector is long over due another crisis.  Spread betting is one of the easiest and cheapest ways for you as a private investor to back your hunches with hard cash. And if you call the market right, you can make big profits, very rapidly

What is spread betting?

Spread betting simply allows you to speculate on whether the price of an asset will rise or fall. You can gamble on everything from shares and commodities to stock market indices and house prices. The beauty is that you don’t actually have to buy the underlying asset you want to trade. You just take a view on the prices offered by the spread betting provider as to whether the price will rise or fall

Spread betting is based on predictions made by bookmakers specifying the range of possible outcomes of an event. A ‘spread’ covers the most likely outcomes of an event and consists of two prices, a higher ‘buy’ price and a lower ‘sell’ price. If you believe the bookmakers ‘buy’ prediction will be exceeded you ‘go long’, conversely if you believe the ‘sell’ position is too generous and that the outcome will be lower you ‘go short’. It is this ability to bet on decreases in an event as well as increases that makes spread betting so popular, especially within financial sectors

Spread betting can broadly be divided into three categories; finance, sport and novelty Financial spread betting allows you to benefit from movement within the stock market and other financial indices without having to purchase stock and is often used to hedge against decreases in share or market value. Sports spread betting can be used to wager on a huge variety of different sporting eventualities from the number of goals scored in a game to the time of the first try in a game of rugby. Novelty spread betting encompasses almost everything else, ranging from seats won in an election to the number of calls taken on a reality TV show – the options really are limitless

How spread betting works

Say an election is approaching and you have a feeling that the Conservatives will do better than either the opinion polls or the bookmakers suggest. Let’s say a spread bookmaker is quoting the Tories to win 230-235 seats. Punters can either go short from 230 or go long from 235, depending on their view. You choose the latter.  You want to be cautious, so you go long from 235 with a modest stake of £3-a-point

If the General Election leaves the Conservatives with exactly 235 seats, your bet ends up all square. If the Tories win, say, 255, then it will make profits of £60, calculated by taking the result of 255, subtracting your opening level of 235, and multiplying by your stake of £3

However if the Tories do poorly and end up with just 200 seats, then your bet will make losses of £105 – 235 minus 200, times £3. In the extremely unlikely event that David Cameron’s party won no seats at all, losses would be £705 – 235 minus zero, times £3

The other key feature of spread betting is that trades can be closed at any time, and do not have to be left to expire. In the example, it could be that a very encouraging opinion poll for the Tories during the campaign caused the bookmaker to raise its spread on Conservative seats from 230-235, to 250-255.

You would then face a choice – either stick with the bet probably until election night, or close it early, at 250, the bottom of the new spread. The second option would produce immediate profits of £45, 250 minus 235, times £3


Margin and margin calls

Because you can quickly lose a great deal if your trade goes wrong, spread betting firms demand some protection that you’ll eventually be able to settle up. This is a deposit called ‘margin’. It varies in size, but is usually around 10% of the value of your bet. If your losses on the trade threaten to exceed that margin, your provider will demand more money, known as a margin call. If you can’t come up with this, the provider will close out your position at the current price

You’ll go broke quite fast if you depend on margin calls to control your losses. So a much better way is to use stop losses. These are orders to close out a trade at your specified level. In the above example, if  the Tories got 175 seats but you’d a stop loss at 200, your loss would be just £105 (235 -200, times £3) instead of £180 (235 -175, times £3)

There is a potential problem with ordinary stop losses however – “gapping”. That’s where the market is moving fast and lots of stop-loss orders are triggered together. Since they close at the market price closest to the specified price on a first-come, first-served basis, you may not get out at the level you expected

The solution to this problem is slightly more expensive but well worth considering – the guaranteed stop. Here you pay your broker a slightly wider spread to get you out at a preset price regardless of how many other stop orders are triggered alongside yours. In effect your broker is buying you out of the trade. At times of high volatility in particular, that’s insurance that’s well worth paying for

What are the advantages of spread betting?

The major advantage is the tax break. Under UK law, there are no taxes on your betting profits, either stamp duty or on capital gains. Another is that it can be an easy and cost effective way to trade. When you buy shares through a broker, you have to pay a fee. With spread betting you don’t. This is because the spread betting provider makes his money from the difference between the bid and offer prices

But it’s not just about cost. Spread betting lets you speculate on a whole range of markets that would otherwise be difficult to access. For example, as well as betting on currencies and shares, you can bet on how many seats a political party will win in a general election, or how many runs a cricket team will score in its innings. There are markets for just about anything

As most spread betting is a ‘live’ form of gambling, it’s possible for you to open and close bets at anytime throughout an event. This means that if the outcome puts you in a loss making position, you’re perfectly entitled to close the bet at any time or to change your preferences. Many brokers offer stop loss accounts which allow you to specify a limit at which the bet will be closed if the outcome moves against you. It’s advisable to use this facility (although it may come at a charge) to help minimise potential losses

Regulation

Spread bookmakers are regulated by the Financial Services Authority in the same way as any other company which sells financial services to the public, but they don’t mitigate for investor ignorance. In March spread betting firm World Spreads went into administration after discovering a 313 million black hole in its accounts. Investors are in line for up to £50,000 compensation

How can I get started?

You can, and should, try out with a practice account. Many providers such as IG Index and City Index offer free demo accounts with thousands of pounds in practice funds, though these expire after 14 days. bullbearings.co.uk allow you to run free trading accounts for an unlimited time

All the big providers also have free apps for iPhones, iPads, Blackberrys etc so that you can trade on the move

By researching the subject of your bet thoroughly, using facilities such as stop losses and only playing with money that you can afford to lose, spread betting can be an exciting and highly profitable form of gambling. Good luck!

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