Personal Finance: Roller-coaster ride to riches

Spread betting is a high-risk gamble that lets you punt on anything from the predicted value of the euro to the number of times Gordon Brown sips a drink during his Budget speech. Get it right and you could make a fortune.

Spread betting occupies an uneasy position between serious investment and mainstream gambling - risking money for the sheer thrill of it. It is definitely not for the faint-hearted. On any particular trade, wins can realistically total hundreds of times your initial stake. However, the potential to lose a similar sum is just as great.

It offers the roller-coaster ride of derivatives trading to everyone. Many of the UK's 20,000 account holders concentrate on sport, but two companies, City Index and IG Index, offer a range of financial markets.

For those wishing to speculate on the FTSE, foreign exchange markets or a range of commodities, spread betting provides a straightforward means of trading without broker's fees. This new way of betting has revolutionised wagering on sport. In a cricket match, every run scored can be vital to your financial position.

The ability to open and close trades in the middle of the event means that you need to keep a close eye on proceedings. At the start of each Test innings, a spread company will offer a market on the number of runs the batting side will achieve. If the initial "spread" is 280-300, you can choose to predict lower than 280 (selling) or higher than 300 (buying).

You choose to go lower than 280 (sell). The batting side collapses to 180 all out. You win the difference between 280 and 180 (or 100), multiplied by your stake.

If things had not gone to plan, and the batting side had reached a total of 500, you would lose the difference between 500 and 280 (220), again, multiplied by your stake. Even a small stake of pounds 1 can result in a very expensive afternoon in front of the TV set.

This principle can be applied to a variety of sporting and financial markets - the number of corners in a football match, or the number of points the FTSE rises. In every case you are risking your stake on each occurrence of an event.

Setting up a trading account with one of the four UK companies requires proof that you have the means to cover conceivable losses. A vast range of markets is then available to trade instantly by phone. These may be on the great economic issues of the day, such as the euro, or the faintly ridiculous. One company offered a market on how many times Chancellor of the Exchequer, Gordon Brown, would take a sip from his glass of water while giving the November Budget speech.

Spread betting can offer a means of hedging risk for companies. Where the strength of the pound affects a firm's export market, it is possible to set up a hedge against damaging currency fluctuations.

For many others, the spread betting companies simply offer an opportunity for private individuals to play the stock market with the big boys. The US has a culture of independent traders - individuals working from home with the aid of a PC (to track prices) and a trading account.

Undoubtedly the market for financial spread betting in the UK is growing as City traders open their own private accounts. Curiously, financial trading also appears to be popular, with a new breed of astute pensioners who are throwing off their gardening gloves in favour of the cut and thrust of the foreign exchange market.

Financial spread betting must come with a health warning. One client, who had a buy position during the October 1987 crash, was faced with a bill for pounds 500,000. Spread betting debts are payable immediately and, unlike gambling debts, are recoverable by law.

The massive gearing on spread bets is reflected in the emotional ups and downs of the account-holder. The realisation that a bet is about to yield an enormous profit can become linked with your own sense of self- esteem and intellectual prowess. When losses appear, the opposite is true. A serious unexpected loss may be accompanied by a degree of shock, developing into something resembling clinical depression. Whatever chinks lurk in the account-holder's psychological armour, spread betting is liable to expose them ruthlessly.

However, the excitement and drama that a spread bet create are unbeatable in any other form of speculation or investment. For those who are sure that they have information or knowledge that the spread companies have not considered, the rewards are there for the taking.

`Successful Spread Betting', by Geoff Harvey, is available from bookshops at pounds 12.95. Independent readers may obtain a copy for only pounds 9.95 post free (saving pounds 3) from the publishers on 01423-507545