Spread betting: Time to jump on a global bandwagon
Thanks to mobile technology and the ease of placing a punt, spread betting is on a roll, says Simon Read
Wednesday 26 January 2011
Is the rising popularity of spread betting a testament to investors' willingness to take greater risks in the search for better returns? Or is it the ease with which it's now possible to trade that has prompted more than a million Brits to open a spread-betting account? It's certainly true that technology is having – and will increasingly have – a massive impact on spread betters. Apps for iPhones, Blackberries and other android devices have freed them from having to be near a computer to make their bets, increasing the opportunities to make regular trades. But there also seems to be a growing readiness among people who are fairly new to spread betting to trade more frequently.
"One of the key benefits of spread betting is that all gains are tax-free," points out David Jones, chief market strategist at IG Index. "But we're finding that a lot of people are signing up because they can get easy access to lots of different markets and react quickly to stories they read in the newspaper."
Traditionally, financial spread betting was all about betting on a stock market index, such as the FTSE-100. Now, spread betters can take a punt on the price of any share, commodity, fund or currency: in short, almost anything that has a price that fluctuates frequently can be open to a spread bet.
In fact one of the key differences between investing in a share and spread betting on it is the ease with which you can do the latter. That doesn't mean it's necessarily a better option, of course. Anyone concerned about gambling needs to think carefully before opening a spread-betting account.
That's because whatever bet you make is leveraged so that profits and losses are magnified. To put it another way, when you invest in a share all you can lose is your initial investment. When you spread bet, your stake is multiplied by the movement in the share.
So if a share slumps 100 points in one day and you spread bet at £10 a point, you'd lose £1,000. On the other hand your tenner punt would yield £1,000 gain if the share soared 100 points. Helping investors understand how spread betting works is one of the key issues of 2011 according to Joshua Raymond, market strategist at City Index.
"Education continues to be a key area not just in growing the spread-betting and leveraged-trading marketplace but also in enhancing the experience of retail clients that use spread betting to profit from market moves," he says. Raymond points out that as spread betting is a leveraged product, profits and losses are magnified in terms of returns on investment when compared with regular share trading.
"Therefore, education is crucial in terms of making clients aware of the risks that leveraged trading poses so that they don't jump in at the deep end too early. Understanding the risks of leverage can be a key element to helping clients enjoy a fruitful trading experience," he says.
Most spread-betting companies offer some kind of tuition whether it's the chance to run a dummy online trading account or free guides and updates. "We run free trading workshops, webinars and road shows while our team of expert analysts write informative commentary on the markets daily to increase client awareness of the key themes affecting the markets," Raymond says.
Finding out as much as you can about spread betting before taking the plunge will pay in the long term. Understanding the risks and opportunities fully will leave you less likely to take too much of a gamble. Different markets can move very quickly and you need to understand them before risking your cash. Opening a demo account first gives you a feel for how different markets move.
One of the things that many people discover about spread betting is that it can quickly open them up to new markets, and that's likely to increase in 2011, says David Jones.
"The stock market has been very popular with our clients in the last year or so because of the recovery but we're certainly noticing a trend for people to look at different opportunities, often linked to major breaking news stories," he says. "When a market starts hitting the headlines, it tends to ignite interest among spread-betting clients."
Jones cites the example of Apple's boss, Steve Jobs, taking medical leave of absence from the company earlier this month. "Depending on your view of what his departure may do to the company, you can spread bet the company's shares, or funds that invest in the shares such as US or technology trusts, or even an index, such as the Nasdaq."
If your view is that Job's departure will damage the firm, you can bet on the share price falling. With spread betting you choose which way you think the movement will be and there is obviously just as much profit to be made out of a share collapse as there is out of a share suddenly rocketing in value.
"In our experience many people have an upwards bias in that they want to position themselves for a rise in the price of a share or index, but even if the Footsie starts to crack, you can still take a position and make money," Jones says. "If there is a windfall move or a collapse, it's great if you're on the right side of it."
Although betting on new markets can be daunting, many investors have seized the opportunities offered by spread betting on a range of financial opportunities, whether it's the US Dow Jones index and UK gilts, or the price of crude oil.
"The next hot market is shaping up to be foreign exchange," says David Jones. "We've seen some very interesting times in currency markets in the last few weeks, particularly with the gyrations we've seen with Ireland, Portugal and Spain. But the downside of betting on foreign exchange is that if you're on the wrong side of a movement, it could be a massive loss."
Oil is another market that Jones says has been attracting spread betters in recent times. "Oil really came back to life with clients in the last two months after it reached highs again, topping a hundred dollars a barrel." But the price of all sorts of commodities can be ideal for taking a position against, he says.
"Gold was a very popular one for much of last year, especially as it was something of a one-way bet for most of 2010. It's got a lot quieter in the last month, but it was only in December that gold hit highs so I expect there to be continued interest throughout this year." Jones says silver is still very strong. "It can be something of an inflation-hedge, which more people are looking at after January's higher inflation figures."
The firm also covers palladium, which some people like to trade, while others have been attracted to backing copper after it recently hit record highs. "Whichever the market, volatility is good for our business," Jones admits.
Looking ahead, spread betting looks very likely to increase in popularity not just in the UK, where gains are free from tax, but abroad, according to Joshua Raymond of City Index.
"Retail trading products are alive and kicking outside the UK's borders and this represents huge growth potential for us," he says. "While spread betting is mainly limited to UK clients due to the current benefits of not paying any capital gains tax on profits, we also offer margined foreign exchange trading and contracts for difference to individuals in more than 50 countries worldwide.
"We see strong growth potential in Europe, Australia, the Middle East and other emerging markets where clients already see the attractiveness of the products we offer. We already have well-established and active operations in a number of countries where we offer retail trading products, including the US, Poland, Australia and China."
As spread betting goes global, it's becoming ever simpler to take a gamble from anywhere in the world. Anyone with a modern phone or tablet, such as an iPad, can trade with ease. And while many people like to spread bet with thousands, it's also possible to have just a few hundred in your account – betting from as little as 10p a point – keeping the risk down while still making the most of the opportunities.
"The sensible way to start is to start small," David Jones advises. "Don't lump in your life savings, start small at a level of risk you're happy with – the markets will always be there.
"If you bet just 10p a point, for instance, even being on the wrong end of a 100-point move on the Footsie would only cost a tenner."
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