Financial Spread Betting
Five years ago, financial spread betting was a City traders’
plaything. But, says Angus McCrone, times have a changed
Sometimes quality products are held back by an unattractive name.
The Lincolnshire seaside resort of Skegness, Thailand’s Phuket
and the Greek island of Lesbos would all probably get more visitors
were it not for their names.
The same is true of financial spread betting. Its clumsy moniker
suggests a complicated, dangerous form of gambling, with no relevance
to the ordinary, sensible investor.
Financial Spread Betting & Playing the Financial Markets
That is a pity, because lurking behind the ‘f’, ‘s’
and ‘b’ word is one of the most flexible methods in the
world for playing the financial markets. It is a tool for the speculator,
the short-term investor and also, on occasion, for people who want
to hedge a financial
exposure they already have. That is not to deny that there
are risks. Spread betting can result in big losses. It is essential
for newcomers to read up carefully in advance and then to bet with
small stakes. No one should go into spread betting unless they have
some money to spare.
There are five specialist bookmakers.
IG Index, the largest, floated on the stock market last year as
IG Group and now commands a £250 million valuation. The others
are City Index, Cantor Index, Financial Spreads and Spreadex.
Some 50,000 people have accounts with one of these bookies. Each
account allows positions to be taken in the FTSE100 index, the Dow
Jones and many others, in hundreds of individual shares, in bonds,
in
currency rates, commodities and options.
Financial Spread Betting - Two Choices
Conventional share trading limits the investor to two choices: you
can either buy a particular share, or you can sit on your hands. With
financial spread betting, you have three choices – you can go
long of a share, you can go short, or you can sit on your hands.
In addition, any profits made on spread betting are not liable
for UK capital gains tax, and investors can usually place a bet
without meeting more than 20 per cent of their exposure in cash
up-front.
Say you were bullish on the stock market and wanted to benefit
from a rise in the FTSE100 over the next few months. You could telephone
your bookmaker and make an “up-bet” on the Footsie in
June. If you risked £5-a-point, and the spread quoted when
you called was 6300-6312, you would stand to make £5 in profit
for every point by which the Footsie exceeded 6312 at the expiry
of the bet in June.
Financial Spread Betting & FTSE
If the June FTSE expired at 6432, you would make £600 profit
(6432 minus 6312, times £5). But if the market went the wrong
way you would make equivalent losses. If June FTSE expired at 6192,
your losses would be £600 (6312 minus 6192, times £5).
In practice, most spread-betting customers do not hold their bets
all the way till expiry. Spread bets can be “closed out”
at any time – even on the day they are opened.
Financial spread betting has been around for 25 years, but it was
only a few years ago, when bookmakers started to offer bets on individual
shares, that its popularity began to rocket. In the last 12 months,
volumes have grown by more than 100 per cent.
Financial Spread Betting And Michael Murray
Michael Murray, at IG Index, says: “A decade ago, 75 per cent
of our clients were from the City. Now, 70 per cent are from outside
the Square Mile – lawyers, doctors,
dentists, bakers, butchers.” Ashley Tatham at City Index
has noticed another change: “A few months ago, the majority
of spread bets on shares were made by people looking for that share
price to rise. Now, more than 20 per cent of trades are “down-bets”
from customers looking to profit from a fall in a share price, or
hedge an exposure from their ordinary investment portfolio,”
he says.
Trades can be made over the phone or via the internet. Bookmakers
publish live prices on their websites; illustrations of how
to trade can be found on independent
sites such as One waybet.com and
Tradebasics.com.
Financial Spread Betting - Open to Residents
Financial spread betting is open to UK residents who can satisfy their
bookmaker that they have sufficient funds to trade. The bookies are
regulated by the Securities and Futures Authority. People resident
in other countries must check the rules in their
jurisdiction. Spread betting is not legal in the US, but is legal
in some continental European and Asian countries.
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