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.
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
Malcolm Pryor is a member of the Society of Technical Analysts in the UK and has been designated a Certified Financial Technician by the International Federation of Technical Analysts. An industry expert in spread betting, best selling author, trader and trading coach