What Do We Actually Bet On As Spread Betters/Traders?

Financial Spread Betting Introduction

Financial online spreadbetting is the hottest growth sector in the UK financial industry. Not surprising considering the British infatuation with speculating (most recently in the housing market). Through online spreadbetting the retail investor has access to trade a wide range of financial instruments that were previously the domain of only institutions and large scale traders. One of the advantages of spreadbetting is its flexibility to trade multiple trading positions in many instruments from a number of countries;  trading positions in stocks, bonds, indices, currencies and commodities can all be managed from one central account.

Spreadbetting – but isn’t that Gambling?

Spreadbetting is considered to be high risk and as the small print says “Spreadbetting, CFD’s and Forex are  leveraged products and carry a high degree of risk to your capital and it is possible to lose more than your initial investment. Only speculate with money you can afford to lose. These products may not be suitable for all investors, therefore ensure you fully understand the risks involved, and seek independent advice if necessary.”

This is true, if you haven’t opened a spreadbet account yet please take my word for it. But besides the warning above,  investing, trading or speculating in anything can be dangerous if you don’t know what you are doing. It is no more dangerous to spreadbet as a “short term trader” and monitor your positions closely than to blindly hold stocks for “the long run”  as encouraged by institutions the worldover.

Trading in general, and especially highly leveraged products like spreadbetting are all about understanding risk and how to manage it. Get this part sorted out and online spreadbetting is not the nail biting experience its portrayed to be.

Many spreadbetters (including myself) bemoan the term “spreadbetting”.  They cite this particularly useful form of trading as a legitimate trading tool with little in common with reckless gambling.

Not so, thinks the UK Government who actually classify it as betting. Semantics aside, being lumped under the same tax status as gambling does have its advantages, no stamp duty to pay and no capital gains tax. Even if you make a fortune overnight! And so professional spreadbetters throughout the UK are probably willing to put up with this public perception if it means more trading profits for them.

Online platforms means there is no need for a broker to execute a trade, and so cuts out the middle man making transaction costs cheaper. Also the ability to “go short”, a term for betting on falling prices, is another major pull of spreadbetting. For the retail investor at least going “short” has been hard or even impossible to accomplish with a traditional brokerage account.

OK so what is a spreadbet and how does it work?

It is always best to start with an example.

After hearing the latest in the financial press that the Public Bank of China is diversifying into gold I want to bet the price of the yellow metal is going to rise. I  “go long” or simply “buy” for £1 per point. I can place a bigger size bet, but lets say I am a newbie. That means for every 1 cents rise in the US$ price of gold I make £1 profit.

If gold moves from $940 to $950 in one trading session (quite normal) then I have made £1000. Yikes, not a bad return eh? Not so fast though. If the price falls from $940 to $930 guess what?  I have lost £1000.

That’s where analysis comes in; along with other essential ingredients such as market timing, money management and emotional control.

The fact is that trading gold at £1 a point is a large trade for most of us. Unless you are  the greatest thing since George Soros, or have a huge bankroll or wish to blow up your trading account in a month that is; the markets that have a high price and large daily swings are probably best avoided.

If you are still convinced precious metals are going up then why not take a punt on Gold’s lesser cousin Silver?

Let us say that on the day gold moves from $940 to $950 silver moves from $14 to $15, buying at £1 a point you have just made £100. Precious metals are just one example. You could be a bull on technology and trade the Nasdaq 100 or may be a bear on UK Sterling and “go short” that currency against the Euro. Or you could trade any specific company’s stock on a host of worldwide stock indexes. The choice really is up to the trader.

Generally speaking bet size runs from £1 up to £100, but this often depends on who you open an account with.

Bets or trades or whatever you wish to call them  can be closed at any time you want. Some customers are day traders, and might close a position after 1 hour, taking their decisions from technical chart patterns. Others may be position traders holding anywhere from a week to a month whilst another group may feel comfortable using only fundamental analysis and holding for an even longer time frame.

Another use for spreadbetting  is as a hedge for a real stock position. Lets say our trader holds a lot of BP stock that pays a  nice dividend  but in the medium term they think the price of oil is heading lower. That position can be hedged by shorting BP, or oil in a spreadbet account. This way it avoids selling the stock and maybe losing the right to the dividend payment.

There are other uses for spread betting too. If directional trading is not your thing you could buy one stock and short another in the same sector. Hoping to profit as either the fundamentally strong one rises more than the weaker one, or the weaker one falls quicker than the stronger one.

What Do We Actually Bet On As Spread Betters/Traders?

We have seen that the financial markets transfer risk – that is, risk of gain or loss of capital invested. All in the name of the profit-seeking, or wealth-conserving motive of the participants. They are extremely efficient in doing this!

For instance, say you have a portfolio of shares and are afraid they may decline in value. These shares are paying dividends which you do not wish to forego. If you did cash them in, you would lose those dividends, and perhaps the alternative places to invest are unattractive.

You could then ‘hedge’ your portfolio by shorting an appropriate stock index. This is quite a complicated area, and you need to do plenty of research before attempting this for yourself.

But the vast majority of traders are not hedging – they are placing straight bets on whether the market will do up, or go down. It is the most basic of trading activities, and the one we are concerned with.

When we place a spread bet on, say, the Rolling Dow Jones, we are voting with our money. If we believe the Dow will go higher, we buy (go long). If we believe the Dow will go lower, we sell (go short) – shorting will be explained in the next section.

Spread Betting The Financial Markets Is Not Akin To Gambling On Horses!

When you go to a bookmaker, you are offered odds on the horse of your choice. Say, you are offered odds of 3-to-1 to win, and you bet £10 to win. If the nag doesn’t win, you lose your £10 – that is the extent of your loss. But if the magnificent beast wins, you win 3 x £10 = £30, and you get your £10 stake returned to you. At the end of the race, you know exactly where you stand, win or lose. Sounds simple, doesn’t it? Many have tried, but few have succeeded, I must say!

This is an example of a fixed-odds bet, which you can place in the financial markets by most spread betting firms. We will not cover these here, as they require a separate book.

Now, when you spread bet the financial markets, say you believe the Dow is headed higher and you place an upbet (go long) when the Dow is at 10,200, and the market a few moments later is at 10,240. Your gain is then 40 points times the bet. Great.

But then the market dips to 10,160 a bit later. Your lovely gain of 40 points has turned into a not-so-lovely loss of 40 points. Not the same as horse racing at all!

The amount you are up or down constantly fluctuates – you can go from Hero to Zero – and back again – in a very short timeframe!

In a nutshell, you there have the big difference – both are a form of gambling, but with horses, at the end of the race, all bets are settled. With spread betting, the bet isn’t settled until you decide to close the bet out.

This puts much more control into your hands, as we shall see later.

What can I Spread Trade on?

There’s quite a bit more flexibility with a spreadbet too, because in addition to betting on individual stocks, you can usually bet on indexes and many other financial instruments. It is worth noting here that with indices you bet for so many pounds per point as rather than per penny.

The bigger spread betting providers will almost certainly cover most of the world’s major indexes, and there are also all other sorts of markets you can place spread bets on – currency exchange just to take one example. Usually you will be able to choose to spread trade on any of the following Financial Instruments:

Although I am a big fan of betting in individual stocks and stock indices, there are wide ranges of potential instruments one can bet on:

  • Individual Shares ‐ UK, European, US, African, Asian
  • Indices such as the FTSE, Euro Stoxx, DAX, Nikkei, CAC, S&P
  • Commodities such as Gold, Silver, Copper, Oil, Gas, Wheat, Soya
  • Currencies such as EUR/GBP, GBP/USD
  • Interest Rates – Euribor, Eurodollar, Euroswiss
  • Bonds – BOBL, Bund, Gilt, US 5/10/30 year
  • Binary Markets such as FTSE, DAX, S&P

CURRENCIES

The currency market has also picked up the past few years and the most common are

  • USD/JPY
  • GBP/USD
  • EUR/USD
  • EUR/GBP

INDICES

Typically are FTSE 100, Dow Jones Industrial, Nikkei, CAC40, and DAX

STOCKS

Most firms do all the FTSE 100 constituents. Some do the FTSE 350 as well but not all use the smaller stocks. Some companies determine this by essence of minimum market capitalization e.g. £100m

Quite a lot of customers are entering the commodities market so there has also been an increase in the amount of companies offering commodity related bets. Commodities now range from cotton and corn to sugar and wheat. Some of the most closely followed are gold, oil and platinum. Sectors form another popular subject which typically include chemicals, industrial engineering and mining.

Of course you can also spread trade on sports or fancy bets such as whether it will be a White Christmas this year or how long the Chancellor’s Budget Speech will last!