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Is Spread Betting Worth The Risk?

Feb 21 2011

The clue is in the title.  Spread betting began as a way for sports fans to add financial spice to spectating and get the biggest “bang for their buck” possible.  Like any form of betting, someone makes a more or less informed prediction about the outcome of an event and backs that hunch up with cash.   Unlike traditional fixed odds betting where it’s simply a question or two possibilities (either Arsenal will beat Barcelona in the return leg or they won’t) the question raised by spread betting is “by how much?” win or loose.   The bookies will issue their prediction of the outcome (AKA the Spread) and in order to beat the bookie the punter must predict whether the actual result will be higher or lower than this figure (AKA the Range).

The concept was transplanted into the financial world by Stuart Wheeler who founded IG Index in 1974 so that investors could punt on the price of gold without all the expense of buying bullion or the hassle of draconian exchange controls that were in force at the time.   The original purpose of spread betting was to hedge investment positions and the activity was largely confined to those active in the financial community. Indeed, research suggests that 90% of spread betters are male aged 35-55, with an average income of £50,000.  Over half of this number works in financial circles, often self-employed.

A spread betting company will quote a bid (selling) price of say 5,016 and offer a (buying) price of perhaps 5,018 for any given share or commodity price on the FTSE 100 index.  The difference between these two prices is the spread. If you think that the index will rise, you might “buy” at £10 a point at 5,018. If you allow your bet to run until close and the FTSE has risen to 5,053, your profit will be the difference between the closing price of 5,053 and the opening price you were quoted (5,018) times £10, giving a total of £350. If you wanted to bet that the market will fall, you would “sell” at 5,016, hoping that it would drop below this level.   Some spread-betting participant’s close their trades daily, but you can leave positions open for longer.   You can set up a “stop-loss” limit, which will close your trade at a set level if the price moves against you which will minimize any loss.  And as spread betting is gambling, all profits are free of capital gains tax - if you do make any profits of course!

Once the preserve of City dealers, spread betting (or in other words gambling  on the direction of shares, commodities or stock market indices) is becoming more popular among ordinary investors, with as many as 150,000 now taking part.  Spread betting may seem like a legitimate investment exercise, provided you remember never to bet more than you can afford to lose.  With some spread betting companies requiring deposits from as little as 3% of the equivalent direct investment value, it only needs a slight movement in the share price in the wrong direction to generate huge losses.  You can limit those losses, but as on the race track or at the dogs - you still have to pay the bookie!  

The author, Allan Bisset, works for a company associated with a leading financial magazine giving advice on a range of investment matters including spread betting.

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