ARTICLE: Why spread betting can be worth gambling on

[Louis Cypher]

www.thescotsman.co.uk
Sat 23 Aug 2003

CONAL GREGORY


ONE of the more novel ways to gamble on the stock market is to spread bet. It is an attractive proposition: there is no commission or stamp duty to pay and the profits are exempt from both capital gains tax and income tax. It was introduced almost 30 years ago, initially to speculate on the price of gold and is the fastest growing form of alternative investment.

However, spread betting carries a high level of risk, so only speculate with money you can afford to lose. Prices may move rapidly against your position which can result in losses which may require you to pay more.

When you make a financial spread bet, the share or bond or commodity is never actually owned. Instead you "buy" the quote if you think that the market will rise, or "sell" the quote if you think the price will fall.

Unlike fixed odds betting, if the market later goes up or down as you predicted, your winnings multiply. Yet if the market moves in the opposite way to your prediction, your losses multiply.

Two crucial safeguards are guaranteed stop-loss facilities and options to limit potential losses.

Imagine having a bet on the FTSE 100 index. If you think the FTSE will fall, the bookmaker may quote a spread of 3,990-4,000 points. If you "sell" £10 per point at 3,990 and a fortnight later your prediction comes true when the quote then is 3,890-3,900, you close at 3,900. The difference is 90 points (3,990 less 3,900). At £10 per point, this represents a £900 (90 times £10) tax-free profit.

It is always possible to close a bet early - the current quoted spread price would then be used. If the bet is left open until the expiry, it will then be closed automatically. It is also usually possible to extend to the next period by rolling the contract over for a small fee.

Since many shares can be volatile, it’s a good idea to place an automatic closing bet - either to buy or sell - at a level specified at the outset. In that way, prices cannot run away with your money when your back is turned.

Another way to limit a loss is to buy an option. This gives the right to purchase (a "call" option) or sell (a "put" option) an asset on or before a specific date at a fixed price.

Spread betting bookmakers decide on the level of credit they will offer. Typically to bet £5 per point on the FTSE futures market, they would require 300 times your stake - £1,500 - as a deposit. For a credit account, if proof of liquid assets is shown, you can usually trade up to half its value. Running losses can continue to 20 per cent of such liquidity.

Among the areas you might consider trading are:

Indices (such as FTSE, Dow Futures, S&P 500 Futures)

Individual shares

Share sectors - such as mining or tobacco

Interest rates

Currencies

Commodities, such as gold

Bonds and options

One way to learn how to spread bet is to participate in the trading academy offered by post over eight weeks from Finspreads. While learning, they allow bets from just 1p per point by internet and £2 per point by telephone.

Cantor Index was the first to introduce sector indices, based on the FTSE All-Share index. They offer a free £1 per point bet on the daily FTSE upon opening an account.

City Index allows you to bid on the change in the housing market and they also have a division for sporting bets.

Deal4free has invented the "rolling cash bet", which is based on the cash market price, rather than the future price, which means the spreads are tighter. A majority - 96 per cent - of their trades are online.

IG Index has just introduced binary betting, giving fixed returns on the daily outcome of major indices. Sports and political bets are also available.

Contacts: Cantor Index 020 7894 8800; City Index 020 7550 8500; Deal4free 020 7170 8200; IG Index 0800 1953400.

CASE STUDY

EDINBURGH-BASED Andrew McLennan, 40, used to sell bonsai trees, but two years ago turned his hobby of spread betting into a full-time interest.

He prefers bookmakers who offer tight margins, preferring deal4free and Finspreads and usually bets £100 per point.

McLennan trades on the FTSE 100, US S&P 500 and occasionally on the Dow Jones index. He also bets on individual shares, achieving good results with Stagecoach and engineering firm Atkins, but disastrously with airlines.

Most of his trading is done after the stock exchange has closed, as quotes can move dramatically even when the underlying exchange is closed.

Two of his tips: shop around for better gearing (requiring less funds to support a bet) and, if you go on holiday, put a stop sign in place in case markets move against you.

[doddster98]

Has anyone here participated in spread betting and if so, I would love to hear about your experience.

Thanks in advance,

Patrick Dodd

[Pancho Sanza]

I used to do it daily, its a lot of fun trust me.[img]i/expressions/face-icon-small-happy.gif[/img]

The equity swings are pretty mind blowing.

You need a decent chunk of money and a strong stomach.

All I can tell you is most people lose at it because they can't stick to a plan.

What do you want to know?

[doddster98]

I guess my first question is whether or not there is a spread betting market maker or a central exchange and if so, is there decent liquidity in the exchange?

Thanks in advance,

Dodd

[jjgold]

Finspreads is the best place but no more americans allowed there. They base there prices on central exchanges for whatever market you are betting, reuters and bloomberg are their source feeds. If you live in the uk you can get credit too with these places but again very dangerous way of betting and betting sports this way is deadly too.

[Pancho Sanza]

I traded through a broker not a bookmaker, so I am not sure how liquid the product is if you trade through a bookie.

I can't imagine they would be as liquid as the traditional markets so you might be better off trading there.

I would guess that the bookies take your bet and lay off somehow, probably with futures or options through a broker.

[doddster98]

Thanks guys I appreciate the help. I will do some more research on this. Will check out http://www.finspreads.com/ as a starting point. Are these echanges open 24-7?

Have a great weekend.

Dodd

[doddster98]

BTW, is this analogous to buying/selling options? Like a naked put for example?

Dodd