What is Financial Spread Betting? A Guide By Malcolm Pryor

What is Financial Spread Betting?

Spread betting products have been around in the UK since 1974. With a spread bet the customer attempts to take advantage of rising or falling markets by taking a bet with a spread betting company on the price movement of an underlying instrument, rather than buying or selling the underlying instrument. As such, spread bets are derivative instruments. For UK tax payers there can be tax advantages in using financial spread betting products, although tax laws may change in the future.

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Example of a spread bet attempting to take advantage of an intra-day rising market

The FTSE 100 index is trading at 7201-7202 (7201 is the sell price and 7202 is the buy price). You think the index will go up and you decide to place an up bet with a spread betting company worth £2 per “point” at 7202. The index moves up. Later in the day it is trading at 7235-7236 and you close your bet at the selling price of 7235. You bought at 7202 and sold at 7235, a difference of 33 “points”. Your profit is 33 “points” times £2 per “point”, i.e. £66. If instead the market had gone against you and you had closed the bet with the market trading at say 7180-7181 then you would have lost 7202 – 7180 points = 22 points x £2 per point = £44.

Example of a spread bet attempting to take advantage of an intra-day falling market

The FTSE 100 index is trading at 7201-7202. You think the index will fall and decide to place a down get with a spread betting company worth £2 a point at 7201. The index moves up. Later in the day it is trading at 7235-7236 and you close your bet at the buying price of 7236. You sold at 7201 and bought at 7236, a difference of 35 points. Your loss is 35 points times £2 per point, i.e. £70. If instead the market had gone down in your favour and you had closed the bet with the market trading at say 7180-7181 then you would have won 7201 – 7181 points = 20 points x £2 per point = £40.

Who is Financial Spread Betting for?

The range of skill and success levels across the spread betting customer base is very large. Spread betting companies are now obliged to publish success levels, with typically more than 70% of customers losing money over a twelve month period. At the other end of the scale, however, for skilled traders and for those willing to do the work required to learn to win, spread betting offers access to profit opportunities in a wide range of markets. There are some people who should not attempt to spread bet, and that includes anyone with any form of gambling addition.

What are the main benefits of Financial Spread Betting?

  • Easy access to a wide range of markets, including indices, commodities, currencies, bonds, interest rate products and shares in major stock markets worldwide
  • Easy route to shorting, the ability to bet on falling markets as well as rising ones
  • Tax advantages for most UK based spread bettors (no stamp duty to pay on UK shares, no capital gains tax to pay on winning bets)
  • Access to leverage, the ability to place bets with the equivalent value of the underlying instruments totalling more than the funds in the spread betting account
  • Access to high quality trading platforms, often including sophisticated entry and position management functionality, real time data and charting packages
  • Easy route to trading overseas stocks, without the high transaction costs often charged by on line brokers for currency conversion

What are the main risks of Financial Spread Betting?

  • A high proportion of customers lose, lacking the appropriate skills and knowledge to win
  • Leverage is a double edged sword and many customers lose by placing bets that are too big for their account size (they are unable to cope with a small movement against them, even if the trade might have eventually been profitable)
  • Overnight holding charges can mount up, creating an additional hurdle for customers to overcome on the route to profitability

My top tips for Financial Spread Betting

Ultimately the skills and knowledge required to win in financial spread betting are very similar to the skills and knowledge required to win in other forms of trading:

  • Have an edge (a proven approach / strategy which will win in the long run)
  • Plan the trade (and trade the plan)
  • Choose an appropriate bet size (which allows the edge to play itself out over a series of trades, but which is small enough to prevent any one trade immobilising the account)
  • Have an exit plan for every trade if it doesn’t work out (e.g. stop losses, time limits)
  • Have an exit plan for every trade once it is profitable (e.g. partial or full exits at a target, trailing stop losses)
  • Have the mentality that no one trade matters, it is a batch of trades being profitable that matters, accept that losing trades are part of the game
  • Have some concept of the “big picture” and trade in line with that big picture (e.g. in a bear market prefer shorts to longs)
  • Don’t expect instant success, it takes time to learn trading skills
  • Keep emotions out of it (fear, greed, hope and despair are common causes of sub optimal trading behaviour)
  • Don’t look for scapegoats if you don’t win – winners accept they create their own results

Three external resources for Financial Spread Betting

  • The Financial Spread Betting Handbook – (3rd Edition): A Definitive Guide to Making Money Trading Spread Bets by Malcolm Pryor, published by Harriman House – a best-selling book on Financial Spread Betting
  • www.sta-uk.org: the website of the Society of Technical Analysts (UK) – a Professional Network for Technical Analysts
  • www.sharescope.co.uk: the website of the award-winning provider of portfolio management charting and data analysis software package developed by Ionic Information

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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