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, stop losses aren’t fool-proof. If the market is volatile and moving fast a lot of stop losses can be triggered at the same time. Your bet may not be closed fast enough and you could lose more than you expect.
“Winnings are also tax-free since there is no stamp duty or capital gains levied on gambling wins”
“Those who want to indulge in spread betting should make sure they are only ‘playing’ with money they can afford to lose and aren’t using it as part of their longer-term financial strategy,” says Connolly.
So, that’s the risk but what about the reward? As mentioned before, there is the potential for big gains with spread betting, particularly because the bets are “leveraged,” meaning that bettors are required to put down only a percentage of the total value of the bet they are making, the balance being made up of credit advanced by the spread betting company. For example, if you want exposure to Tesco you could buy 10,000 shares, but it would cost you in the region of £17,000. Alternatively, you could place a trade with a spread bet, for which you would need to deposit only 4 per cent of the value of the trade, £680 in this example.
Winnings are also tax-free since there is no stamp duty or capital gains levied on gambling wins.
Spread betting offers a way to profit when markets are falling because it enables you to bet on prices going down as well as up. It also offers access to markets that you may otherwise struggle to invest in. For example, you can spread bet on all sorts of weird and wonderful currencies and commodities.
However, the same “leverage” that enables you to amplify the return on the capital you put into successful bets, giving you “more bang for your buck,” can also result in losses on bets that go wrong that are greater than the capital you have deposited. In these cases you will need to deposit more money to cover your loss.
Spread betting offers a cheap way to bet on financial markets and the potential for big returns. But it is high-risk: only play with money you can afford to lose and make sure you use stop losses to protect yourself from losing more than you are prepared to write off.