Spread betting excites a nation of gamblers

Confirmation that the Government is to scrap plans for Britain's first supercasino put another nail in the coffin of gambling reforms this week. While Labour administrations have spent most of the past 10 years liberalising the industry – scrapping betting tax and rewriting the arcane laws that have deterred most people from visiting casinos – a political backlash has driven the modernisation into reverse.

But one corner of the betting industry continues to thrive, chalking up ever larger profits, and attracting an ever-broader population of punters. More than 100,000 spread bets are made in Britain every day, and while many are still accounted for by high-rolling city stockbrokers, the industry is now beginning to reach out to more widely.

"All types of people are getting involved," says Tom Hougaard, chief market strategist at City Index, one of the UK's largest spread betting firms. Many punters use spread betting to spice up a punt on sports fixtures, but the financial end of the industry is growing fastest. Hougaard says most financial spread-betting clients indulge for fun, but "with a serious edge". However, he adds that there are also practical uses for spread betting, such as using bets to hedge risk in your investment portfolio.

So what is financial spread betting?

Financial spread betting gives you exposure to movements in a stock, index or currency at a fraction of the cost of buying directly – typically between 2 and 10 per cent. It also allows you to make money from prices going down (shorting) as well as up. And because it's betting, gains are not subject to tax or stamp duty.

How does it work?

When you go to make a trade, you'll be quoted a "spread", which is effectively two prices. Just like when you trade a regular share, the higher of the two is the price at which you buy, while the lower is the price at which you sell. You then make a bet for each point (usually one penny on a stock) that the stock, currency or index moves.

So if you believe that shares in HSBC will rise, and you are given a spread of £7.98 to £8 a share, you might bet £10 a penny at £8 a share. This means that for every penny the shares rise above £8, you will make £10, just as you'll lose £10 for every penny by which the shares fall.

To make the same return in the regular market, you would have to buy 1,000 HSBC shares, which at £8 a share would cost you £8,000. But as a spread bet, the transaction will cost you only £800 – money which will stay in your account, but will be tied up as collateral, and released when you close out the bet.

If shares in HSBC then rose 100 pence to £9 after you had placed your bet, you would make a profit of £1,000 (100 x £10). Equally, if the shares fell 100p to £7, you would lose £1,000. This is the great risk of spread betting – you stand to lose more than you invested – unlike with ordinary stocks.

Can I limit my losses?

Yes. Brokers can put a stop loss on your account, so that your position will be closed out once it falls below a certain level. Some brokers offer accounts that never let investors lose more than they started with.

There are two types of stop losses. Regular stop losses will not guarantee your position is sold out at the price you set. So, if your HSBC shares dropped from £8 to £7 in a morning, and you had a stop loss at £7.50, the broker will not guarantee to get you out at that price. If the market is moving too quickly, you may have to accept a lower price.

A guaranteed stop loss will always close your position at your predetermined price, but costs more.

What are the benefits of spread betting?

Spread-betting transactions are not taxed or subject to stamp duty. They are also commission-free. Yet spread betting is not free. Brokers take their cut, and it can be cheaper to buy a security. The advantage of spread betting, however, is that you only need to front a fraction of the money.

Although capital gains tax exemption (CGT) sounds enticing, this is only useful for investors with larger portfolios. Every UK citizen has a CGT allowance of £9,200 a year – more than enough for most. However, if you exceed your allowance, all gains will be taxed at 40 per cent (or 18 per cent from 6 April).

Spread betting allows you to go "short" – make money by betting that a share price or currency will fall. There are few other ways for private investors to do this.

...And the downsides?

Spread betting can be incredibly high risk. Without adequate stop-losses, it's easy to lose a lot very quickly. And it's easy to underestimate the risks. Taking a £10 a point position on the FTSE 100 means you could lose £15,000 if markets dropped 25 per cent.

And all contracts have expiry dates. The longest contract you can currently get expires in December.

How can spread betting cut portfolio risks?

If you have 80 per cent of your money in UK equities, you might want to consider shorting the FTSE All Share using a spread bet. This means that if the market falls suddenly, you will make money from while everything else in your portfolio is falling.

How do I get started?

The big names are City Index (www.cityindex.co. uk), Cantor Index (www. cantorindex.co.uk), IG Index (www.igindex.co.uk) and CMC markets (www.cmc markets.co.uk). All offer some free spread-betting education. Finspreads (www.finspreads.com) and IG offer trading academies, which allow you to start off betting from 10p a point.

Cover all your options

Sports spread betting allows you to take a punt on everything from the time of each goal in a football match, through to the total number of runs scored in a cricket match. Just like financial spread betting, you'll be offered a spread which you can buy or sell.

For example, if you wanted to bet on the time of the first goal scored in today's Arsenal vs Aston Villa match, you might be offered a spread of say 22-26. If you thought the first goal was going to be sooner than 22 minutes, you would sell at, say, £10 a point. If the goal then came in the first minute of the game, and there certainly are plenty of those you would win £210. If no goal came in the whole game, however, you would end up losing a not inconsiderate £680 [(90-22) x £10].

At the sillier end of the scale, you can even bet on things like the total of the goal-scorers' shirt numbers in a match.

Given that Arsenal's second top goal-scorer this season is Cesc Fabregas (pictured right) – who wears a number 4 on his shirt – you might favour a low total for this weekend.

However, one goal from young Theo Walcott – number 32 – could mess everything up.

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