Introduction to Financial Spread Betting

Published: 22/10/2010

Imagine a way to profit from the FTSE 100 or the NASDAQ stock index with no paperwork, no stamp duty, and no commissions paid. That, in a nutshell, is financial spread betting. Akin to sports betting, it is an extremely flexible way to take advantage of up and down markets via short selling. It applies not only to stocks and bonds but also to currencies, options, commodities, shares, and other financial instruments over a broad range of outcomes and within a clearly defined timescale. And it is 100% tax-free.

In volatile markets such as those seen in the past few years, financial spread betting gives individuals opportunities to prosper regardless of the direction the indices take. Industry analysts have estimated that nearly half a million spread betters already exist and their numbers are growing. Similarly, the number of online operations accepting their wagers is continuing to rise.

Spread Betting Basics

Financial spread bets are placed with a broker who serves like a bookmaker, quoting a two-way price or “spread.” For example, the broker might quote the FTSE 100 at 4300~4302. A customer can then bet the market either way, going up or down, with an associated cost per point.

In this case, a spread bettor expecting the market to rise would buy at the “offer price” of 4302. One believing the market will drop would sell at the “bid price” of 4300. The risk either way would be £1 a point. If the market rallies to 4312, the buyer would sell out at 4312 – 4302 = 10 x £1 a point or £10 in profit. But the seller would lose 4312 – 4300 = 12 x 10 x £1 a point or a £12 loss. The broker pockets the difference, £2, and there is no need for anyone to pay a commission.

The danger of financial spread betting should be rather obvious. When a £10 bet is placed on a horse race at 8-1, the maximum profit is fixed at £80 and the loss can be no greater than £10. For financial spread betting, nothing is fixed. Both profit and loss are open-ended, so a rise or fall in the FTSE 100 of a few percent can translate into £100’s won or lost.

Taking Precautions

In order to minimize the risk of financial spread betting, bettors can use a device known as a “stop loss.” When making the initial bet, a stop-loss order is placed that will automatically sell the wager for a loss if the gap reaches a designated maximum. The seller who took the bid price of 4300 in the example above might have set a stop loss order at 4310. Before the market reached 4312, the order would have limited the loss to 4310 – 4300 = 10 x £1 a point or a £10 loss.

Once the stop loss is triggered, however, the wager cannot be recouped. That’s why such orders should not be set too conservatively. Markets are volatile and have a tendency to flag or rebound unexpectedly. During a given day, trading often drives the index up and down within a range of 30~40 points. As long as the risk is within reasonable limits, a financial spread bet is best held till the very end of the session for which it was intended.

Another way to place some controls on financial spread betting is to use an order placed in advance of an event. A “market order” is an instruction to buy or sell at the current price. A “limit order” can be set to sell at a certain point above the current market or buy if it drops below a given value.

Opening a financial spread betting account is a straightforward process that can be done online or via telephone. A “credit account” can be established by depositing funds with a chosen broker or a “debit account” can be set up using a credit or debit card. The amount designated will be the maximum potential loss, and it is taken out, up front, by the broker. Any winnings are credited back to the bettor, and accounts can be closed at any time by withdrawing what remains of the original stake.

Published on: 22/10/2010

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