Spread betting can be fun but needs careful handlingby Ruth Jackson / June 16, 2016 / Leave a comment
If you are looking for bigger returns in this long era of low interest rates then spread betting offers them. But it is a high risk form of investment gambling that isn’t for the faint-hearted.
Spread betting enables participants to speculate on whether the price of an asset will rise or fall. You can bet on anything from shares to stock market indices to house prices to commodities. You don’t actually buy the asset, you simply look at the prices being offered by a spread betting provider, decide whether you think they will rise or fall and place your bet accordingly.
A spread betting provider will offer you a quote made up of a bid price (the selling price) and an offer price (the buying price). If you wanted to bet on the FTSE 100 which was at 6,000, you might see a bid price of 5,998 and an offer price of 6,002. If you want to bet on the index rising you can “buy” the offer price at £10 a point. That means that for every point the FTSE 100 rises above 6,002 you will earn £10. If the market falls you will lose £10 a point.
If your bet is correct, you can make large profits, but equally losses can rack up quickly as well. In this case, if the FTSE 100 fell by 100 points you would be £1,000 out of pocket.
“We don’t recommend spread betting to our clients,” says Patrick Connolly, a certified financial planner at Chase de Vere. “There are huge differences between saving, investment and gambling and spread betting clearly falls into the final category. It has the potential to produce big financial gains, but is just as likely to result in major losses.”
It is possible though to protect yourself from the worst losses when spread betting. You do this by using stop-losses. This is an order to close your bet if the price you are betting on reaches a specified level. So, taking our FTSE 100 example, if you had bought at 6,002 but set a stop loss at a bid price of 5,990 your bet would be “stopped out” if the FTSE 100 fell to 5,990 meaning your loss would be limited to £120. But,…