It takes a cool hand to play at spread betting

If you can afford to lose, you might just win at this high-risk trading game, says Simon Hildrey

Although investing in the stock market might feel like a gamble at times, fund managers argue it is far more scientific than that. But when it comes to spread betting, few in the industry would disagree that clients are doing little more than taking a punt.

Although investing in the stock market might feel like a gamble at times, fund managers argue it is far more scientific than that. But when it comes to spread betting, few in the industry would disagree that clients are doing little more than taking a punt.

Although many people avoid spread betting for that reason, it is one of the few investments to have benefited from the three-year bear market. The ability to gamble on a variety of things, from whether the value of a share or index will rise or fall to how many goals your football team will score, has attracted an estimated 100,000 UK investors.

Spread betting is similar to placing any bet, but with a difference. With ordinary betting, you're either right (your horse wins) and you win money, or you're wrong and you lose your bet. With spread betting, the more right you are, the more you can win. But the more wrong you are, the more you can lose beyond your stake.

One of the main attractions of spread betting, explains Simon Brown, strategy director of easy2spreadbet, is that you don't have to pay capital gains tax or stamp duty on your winnings. This is because you are not actually buying shares, indices or commodities. As trading of shares is subject to 0.5 per cent stamp duty, this can lead to significant savings.

Spread betting carries no brokerage fees, dealing costs or commission, either. However, you can't offset losses against gains you have made on other investments. And unlike a share holding, a spread bet does not benefit from dividends.

Given that spread betting is a risky business, you must approach it carefully. If you bet that a share price will fall, you take a "short position"; if it actually rises, your losses will be unlimited if you don't pay for a "guaranteed stop loss point". This puts a cap on the amount you are prepared to lose: for example, if you short company X at £1.40, you can pay for your position to be closed at £1.50.

Spread betting on the movement of a company's share price is the most popular form of trading. You take a punt on the movement over a pre-determined period, which can be daily, three months or six months. The shorter the time period, the narrower the spread.

Angus Campbell, head of sales and marketing of Finspreads, another spread betting firm, says that many investors prefer to trade on a quarterly view, betting on what the company's share price will be at the end of the next quarter in March, June, September or December. You can hold the bet until maturity or exit early if you make a gain, and can also roll over the bet from one contract period to the next.

In spread betting, your stake is placed on the movement of each point of what you are betting on. "What a point represents varies between asset classes," explains Mr Brown at easy2spreadbet. "For a share in a company, a point equates to a penny. If company Y is priced at £1.40 and you bet £10 per point and it rises to £1.45, you gain £50."

The minimum stake is often 50p or £1 a point, but some spread betting firms allow investors to bet 1p a point for the first eight weeks to enable them to learn how the system works.

One of the risks of spread betting, warns easy2spreadbet's Mr Brown, is that you are betting on geared, or "borrowed", trades. This is known as trading on margin.

"A deposit of £100 will give you exposure to the equivalent of £1,000 worth of shares, as you typically only need to pay a 10 per cent deposit," he says. "But this carries a high degree of risk. You should trade only what you can afford to lose."

Mr Campbell explains: "All firms have a margin requirement - the deposit we need to cover any adverse movement in the position you hold. These differ depending on the volatility and liquidity of the stock: for FTSE 100 stocks it is 10 per cent, rising to 20 per cent for other indices."

Many people place spread bets because of the access this provides to investments it is normally difficult to buy - such as the movement in house prices and interest rates, and currencies and commodities. Clients have the ability to trade in shares listed in other countries without the currency risk.

If you decide to take the plunge, it is vital to make sure you are happy with the level of risk involved, and monitor the market constantly. "You must be prepared to lose money," says Patrick Connelly, research and investment manager at independent financial adviser John Scott & Partners. He adds that clients who like to punt on shares may use a small part of their savings to spread bet. But he stresses: "This has to be separate from their financial planning."