In general, we like to be positive about spread betting. We’ve often said it is one of the greatest innovations to happen for private clients in the investment world for some time.  But this time they may have gone too far…

There is a big difference between investing and spread betting.  The two are not really compatible unless spread betting is used to hedge an investment portfolio.

However, the introduction of IG’s stockbroking service may actually cause some unforeseen damage to the investment portfolios of UK investors.

There is no doubt that long term investors generally make money and short term speculators lose it.  In fact, there has never been a period of more than twelve years when an investor would have failed to make money by doing nothing holding index trackers.  The only speculators that actually make money are market professionals and hedgers.

One of the issues here is that spread betting is for fun money.  It’s for people that want to take high-risk bets for the chance of making highly leveraged profits.  Spread betting is a margin product and like all big gambles, traders know what they are getting themselves in for.  High reward equals high risk.

The profile of the idea spread betting customer is someone who has a net worth excluding principal residence of £100k.  Has around £90k in long term investments such as bonds, funds, dividend-paying FTSE 100 stocks and trackers.  Then £10k of this in high-risk self-directed investments such as small-cap shares and leveraged products like spread bets and CFDs.

The worst case here is that the clients £90k will continue over the years to grow in line with the rest of the investment markets.  Some ups and some downs but will generate a significant rate of return over the years.

But, what happens when all of a sudden that customer is tempted to use that £90k as collateral against his high-risk investments.  All of sudden his trading power has risen from £10k or £100k exposure to almost £1m in potential exposure.  If the collateral lodged is of sufficient quality and gets a haircut of only 95% then a 10x move in the market, index, currency (or what he trades) could totally wipe out the entire portfolio.

Clearly, these products are execution only and the client will only have himself to blame for the losses.  After all IG are just providing a platform to invest and speculate.  But greed is rife.

There is a reason, that brokers are segregated and collateral has traditional only been used by professional investors.  Obviously, if the client has a high-risk portfolio, then the haircut will be higher so the potential exposure will be lower as per the risk profile.  But it’s still a tricky little situation.

But, then again, you could have said the same thing when IG pioneered the industry way back when.  It will be interesting to see what happens to investment portfolios help by IG over the coming year.  Will they all be liquidated to cover margin calls or will IG turn into a Hargreaves Lansdown?

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