SPREAD BETTER

It’s fast and furious, but if you handle it right spread betting can turn volatile markets to your advantage.

WORDS BY PIPER TERRETT
ILLUSTRATION BY TELEGRAMME

RECENT TURMOIL IN THE EQUITIES MARKETS HAS made conventional share trading an unattractive prospect, as share price movements have proven highly volatile and difficult to predict. But, as always, it’s not all doom and gloom in the City, and private investors are increasingly using spread betting to cash in on the markets’ volatility. Providers say that, as the uncertainty in equities continues, demand for spread betting is growing exponentially. “Spread betting has become so popular for two reasons – the fact that it’s a margin product and by its staggering efficiency,” explains David Buik, market analyst at BGC Partners. “It’s the most efficient way of trading. Stocks and shares are less efficient because you’ve got to have contracts and settlements.”

With conventional share trading it can take up to three days for investors to receive their profits, but spread bets are settled immediately. Plus, while the image of the spread bettor is that of a short-term punter, companies say this isn’t always the case. “A popular misconception is that spread betting is for short-term traders,” says David Jones, chief market strategist at IG Index. “People do jump in and out during the day, but many also use spread betting on a longer term basis, for example if they feel that Barclays will go up over a period of time.”

But just how difficult is it to master and what are the risks? Spread bettors don’t invest – they bet on the movement of a share or index, such as the FTSE 100. When they bet on a specific company’s shares, they don’t buy the shares. Instead, they bet a fixed amount per point that the shares will rise or fall and for each point movement they win or lose an agreed amount. For example, they might bet €10 a point that the FTSE 100 will rise in the next two days. If they are correct they win €10 for every point the FTSE 100 jumps and, if they’re wrong, they lose €10 for every point the index falls.

There are many benefits to spread betting compared with share trading. In spread betting it’s possible to make money from a falling market by short-selling an index, such as the Dow – betting that it will fall within a certain time period – or an individual share. “You can trade markets in both directions, so you can short the market,” says Jones. “Plus there are many indices you can trade. Recently we’ve seen people turning their back on individual shares and trading the bigger indices – the FTSE, Dow and currencies. The stock market’s been too crazy to trade shares.”

Plus there are significant tax breaks. “It’s a tax efficient way of trading,” explains Joshua Raymond, market strategist at City Index. “All profits are free from capital gains tax. You don’t pay stamp duty and you don’t pay commission. But you pay a spread. If Vodafone is trading at 125 cents and you want to buy it, you’ll perhaps buy it at 125.5 cents.”

Spread bettors trade ‘on margin’, meaning that their initial outlay is less than in conventional investing. For example, if you buy €1,000 of shares, you give your broker €1,000 plus fees. In spread betting, your deposit on a €1,000 position could be just €50. However, there are considerable risks. “A big drawback to be aware of is that you are trading on margin,” warns Jones. “If you were spread betting on Vodafone you’d need to put up €50 to control the €1,000 position, but you’d still have €1,000 in play. If the market moves quickly you can lose more than you put up initially.”

Buik says traders must track the markets vigilantly. “Spread betting is probably one of the most dangerous financial instruments if you’re just [playing around] with it,” he says. “You have to be constantly in touch with the market via your computer screen or BlackBerry. It’s like committing hara-kari if you don’t.” There are ways to stem your losses, however. Spread bettors can make use of stop loss systems to ensure their trades are closed down and their losses reduced if their bet backfires.

Spread bettors can also trade commodities, such as oil and gold, and exotic indices. “You can bet on shares and markets worldwide,” explains Raymond. “With a standard stockbroker [you are more limited]. But in spread betting you can trade currencies, oil and international markets. It gives you flexibility.” The FTSE 100, Dow Jones and German Dax are some of the most popular indices traded by clients at City Index and BGC/

Cantor Index, along with crude oil, banking stocks and currencies. However, the standard UK and US indices tend to be the most popular bets. “There’s been enough volatility in the mainstream markets that traders haven’t had to go searching for exotic things,” points out Jones. “We offer a spread bet based on house prices, though, and that’s been very popular.”

Experts say beginners should use the fantasy spread betting tools available on providers’ websites before doing it for real, and watch online tutorials. However, Raymond believes you will only learn about your own trading psychology by spread betting for real.

“The biggest factor in spread betting is the psychology of the trader,” he argues. “If you’re losing, your emotions are involved. Clients tend to take their profits early and run their losses because they’re optimistic. I say that you trade yourself first and the market second.” He claims there is a big difference between the attitudes of investors towards share trades and spread bets. “If you compare it with a stockbroking trade, most people will buy the shares and go away and have a cup of tea,” he argues. “But with spread betting you’re watching the screen the whole time. Having a trading strategy is so important. If you’re a rational person, you’ll think rationally. ‘My target is here and I close here’. Stick to it.”

Professional traders say beginners should stay in their comfort zone by picking an index or share they’re familiar with and deciding which events could affect it. “Spread betting is geared towards short- to medium-term investment strategies,” says Jones. “Start with something you’re comfortable with – UK shares or the FTSE 100.”

It’s also best to bet a small amount per point at first. “Always start off small because the risks are lower,” says Raymond. “And always come up with a strategy. Think about how much you want to gain and what you’re willing to lose. For example, if you want to trade Rio Tinto, look at what’s happening with the company. Is there a trading statement coming up? Look ahead.”

Above all, investors must see spread betting as a tool in their wider investment strategy and be prepared to lose money. “Accept the fact that you’re going to be wrong sometimes and trade at a level that’s sensible,” advises Jones. “A typical account at IG opens with €1,000. Put in a level of money that you can afford and use the stop losses. Never put all your eggs in one basket.” Buik also warns bettors not to be overconfident. “Don’t trade too often and don’t be greedy,” he says. “People who’ve had success can grow too confident. [If you fail], regroup and think again.”

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