Ryan O’Doherty, Head of Product Development at CMC Markets on the Pros and Cons of Financial Spread Betting

Watch our video interview with Ryan O’Doherty, Head of Product Development at CMC Markets to find out more about financial spread betting

The transcript of this video interview is below:

Welcome to Good Money Guide TV. We’re here with Ryan O’Dougherty from CMC Markets. We’re going to have a quick chat about spread betting, what is spread betting, who it’s for, what are the main benefits, the main risks, the best time to trade, and also, the most common mistakes traders make and how to avoid them. Ryan, how are you? Welcome.

Thanks for having me.

Thank you for joining us. So you’re from CMC Markets.

That’s correct. CMC Markets; we offer spread betting and CFD trading around the globe.

So just take us quickly through what spread betting actually is.

Spread betting is a very popular way of trading the financial market. So it’s only available here in the UK and in Ireland, and it’s a different way I guess to trading than you’re probably used to when you’re trading physical equities etc., in the sense that you’re trading a number of pounds per point, and that regards to how many points a particular market moves. And it’s multi-asset, so you can trade a whole range of different products; currencies, indices, FX, cryptocurrencies, treasuries, etc. So you get a wide range of products to choose from. But there’s a number of advantages. Spread betting is capital gains tax free so that’s one of the main features and why it’s available only here in the UK and Ireland. But the big advantage is that you can actually benefit from both a rising and a falling market as well. So traditionally, clients are used to physical trading, physical share trading, where they have to wait for the market to go up in value, to profit. With spread betting, you can benefit from both a rising and falling market.

And in terms of risk, what are the main risks involved in spread betting?

Well the other major benefit is that you’re trading on margin. So you only need to put in a small amount of your own capital to take out a much larger position. So that’s great that you can get access to markets that you wouldn’t normally be able to get access to. But then that can amplify your profits, because you’re only putting in that small amount, but your actual exposure is the net exposure of the position. So you can amplify your profits but you can also amplify your losses.

And in terms of who it’s for, I mean who is a suitable customer for a spread-betting broker? Who should be trading? Should an absolute beginner be trading in it? Should you have some experience in the market?

I think it’s for both. Definitely, some experience helps because there are risks associated with spread betting, but it is there for the new trader as well. So there’s a whole lot of tools that clients can use to sort of get familiar with the market. So they can use demo accounts, for example. So they can play around with how to get used to the markets, what sort of risks are involved, how they can place trades, etc. And you can trade in such small amounts. So you can trade in fractional amounts. You can trade 0.1 of a pound per point movement. So you can get into it quite small, and then as your experience grows, you can then start to increase your exposure. So it really is for a good mix of people. And because it’s multi-asset, it attracts a number of different clients from different areas. So you know, you’ve got a lot of the regular traders that trade your FX markets and your indices markets. Then you’ve got clients that have come from physical share trading, coming across into the market and getting familiar with those types of products. And you’ve got the new-wave type of traders coming through that are interested in the likes of cryptocurrencies etc. So it really does cover a wide, broad range of clients.

And obviously, multi-asset means of course you can trade a wide variety of markets, so shares, foreign exchange, cryptocurrency, indices and commodities. Obviously on the CMC Markets platform, what would you say are the most popular markets that your customers trade?

I think the new-wave traders will start with, let’s say, some equity trading, because they’re kind of used to that sort of market base.

There’s a nice news flow.

Absolutely. That familiarity is a really important thing for clients when they come on board. But what we start to see is as clients start to get used to what products are on offer, you’ll start to see them move towards your indices, which is probably the most popular product, because it’s a diversified way of getting access to the market. So you believe the market’s going to go up in value, so you’ll look at a general position in the UK100, for example, or the US30. Then if you use indices, then the next biggest one is FX. I mean the FX market, it’s one of the most liquid markets in the world. There’s a lot of people that trade different currency pairs, the spreads are lower, there’s some real advantages in trading those, and the volatility’s there. So there’s opportunity to profit from those markets.

And as of course, you offer a multi-asset platform, shall we just have a quick look at your platform and you can talk us through how your platform would typically look, where things are and what you can do?

One of the things with platforms these days, you have a whole range of very different platforms out there. And you can see just on the screen at the moment, you’ve got a huge range of features that are available. Now this is probably the more advanced screen, but one of the tools on our platform is that it’s completely customisable, so you can start off with a very basic screen to start with, just have a watch list, some charts and your positions, and then as you start to expand, you’ve got access to a number of trading tools or trade ideas, such as sentiment, what other clients are currently trading at the moment. You’ve got economic calendars, so you can actually see major market events and how that’s going to affect the market.

So that’s in the bottom right.

That’s in the bottom right. And then you’ve got tools like Reuters News, where you can get a constant stream of updates of what’s affecting the market. And you’ve got notification tools as well, so you know, they’ll be a notification pushed to your mobile phone or to your desktop, just to say certain events are happening in the market.

And is that client sentiment sort of top middle right?

The blue and orange bars. That’s really quite a good tool for new traders especially. It’s showing you what other traders are currently doing. So you can start to see whether or not they’re long or short on a particular position. So you can see the UK100 there has got a net long position, so more clients are long on that trade than short. But then if you go down to let’s say the SPX, you’ll see that there’s a net short position, rather than a long.

And I read somewhere you can filter that sentiment down to clients that make money and clients that lose money, so you can look at what traders who are actually making money do.

You’ve got two types. You’ve got all clients and you’ve also got your top clients. So we mix those up a little bit so that clients can see the top clients that have made money over the last three months, what they’re doing. And so you’ve got a whole range. Not just that, it’s position value, as well as number of clients.

That’s interesting. And in terms of sentiment on your platform, do you ever look at how the markets have reacted to your sentiment? Because when I was at Investors Intelligence, we used to run a sentiment indicator called the advisor sentiments indicator. It’s been going since the 1960s and we’d basically look at professional advisor sentiment. And we would say well, everybody is bullish, so everybody thinks the market’s going up. So because everybody thinks it’s going up, it obviously crashes. It’s a contrary indicator and quite a good lead indicator as well.

And it can be. And I think that’s why we broke it down into all clients and top clients as well, so you could really the difference between, you know, what the general populous is doing in regards to whether or not they’re net long or short, but then see what the profitable traders are doing. And you know, being able to compare the difference is actually quite interesting, because quite often, it’ll be the opposite. So that gives the client, especially that hasn’t traded a lot in the past, the ability to sort of say well, actually, maybe the all view is not the right one to go for but the top view is.

Absolutely. Well that’s what makes a market, isn’t it? Difference of opinions.

Absolutely.

And also finally,you’ve been with CMC for a long time, you’ve been in the markets for a long time as well. For anyone either thinking of getting into spread betting for the first time, or even for experienced spread betting, in all your time in the markets, what would you say are the top three mistakes that people make when spread betting?

It’s a good point because there’s probably, three that really stick out. The first one is the clients really need to do their research, really understand the products that they’re trading. It’s too easy to go in and just do a quick trade on a particular product, and then lose a certain amount of money on that. You know, it’s worth doing some research.

And then, the next one is really around risk management. So when placing orders, you’ve got a whole range of tools that can help you, you know, prevent risk. So you’ve got your stop losses, you’ve got guaranteed stop loss orders, which protect you against any sort of adverse movements. And a lot of clients don’t place those when they first get on to trading and, you know, can lose a large amount quite quickly when some of these markets are quite volatile.

So definitely the research element and then sort of your risk management tools are really important elements to get right. And then cost is probably the next thing to look at. There’s a number of providers out there in this sort of spread-bet sphere, all offering different spread bet costs associated. Some of them are hidden, some of them are upfront. So just be really aware of what costs are involved in placing a trade, because that eats into your profit. So the more it costs you to place the trade or to hold that position for a period of time, so just really investigate the costs involved.

And on costs actually, it’s quite an important point, I mean the costs of spread betting are built in to the spread, and traditionally, you have your spread cost, which is, you know, the market will be trading at one and two and price will be slightly wider than that, and then also, you have overnight financing costs as well. So just talk us briefly through spread costs and overnight financing as well, because I think it’s important for people to, you know, when customers see a product that doesn’t have any visible costs attached to it, I think it’s important that they understand how.

I totally agree. I think, you know, the spread cost is the number one. So obviously, the difference between the bid and offer price is the spread. So the tie to that is the less the market has to move before you start making a profit. So you want to have a tied spread. So if, for example, FTSE is trading at 7,000 and 7,001, there’s a one-point spread. If you’re trading at £1 a point, that’s initially going to cost you £1 to get into the trade. So that’s your spread cost, and you know, different markets will have different spreads, depending on liquidity. So the more liquid the market, probably the tighter the spread. So that’s the first cost.

Holding costs. So if you hold your position overnight, because effectively, you’re in a margin position or you’re leverage trading, so you’re borrowing.

You’re essentially lending the money.

Exactly. So you’re only putting in a small amount but taking out a much larger position. So effectively, you’re borrowing the rest of the funds. And so if you hold that position overnight, so past 10 pm UK time, you’ll get charged the holding cost. A bit like interest on a loan in any sense. So you’ve got that cost associated as well.

And then you’ve got commission. So on spread bet, you don’t pay commissions, but with regards to equities, what happens is there widen the spread by the value of what that commission is. So you don’t get charged an individual commission cost. You just get a wider spread.

So it varies, based on transaction size…

Absolutely. And the market that you’re trading. So it’s one of those things that you don’t really notice when you first get into trading but worth investigating to make sure you’ve got a good deal.

Well Ryan, thank you very much for your time.

Thanks for having me. No, it’s been a pleasure.

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