Spread Betting or Spread Trading, as I understand it, is trying to predict the future value of a financial market, and profiting from a correct prediction. This sounds similar to Trading at first sight. However, there are some advantages of Spread Betting over Trading, especially for those of us with less disposable income, and I shall try to cover these points as best I can.
- You don’t need as much money to play the market: With traditional Trading you buy stocks, and shares, and currencies, and all that stuff, because you predict that its value will rise and you will be able to sell that stuff at a later date to realise a profit. With Spread Betting you never actually own any stocks, or currencies, or stuff. This means that you can wager as little or as much as you have, much like on a horse race where you can wager £1 to win or £1000 to win, for example.
- You can win with Spread Betting if a market goes down as well as up: With buying stuff, you have to see that stuff increase in value to realise profit. With Spread Betting you are placing a wager in whether you think the market will increase or decrease in value. If you are right you still win, so in theory this doubles the opportunities to be right. Of course, you could argue that this also doubles the opportunities to be wrong.
- There are much lower costs involved in Spread Betting: There are no commission fees to pay brokers in Spread Betting because you are not buying or selling anything physical. There is a slight commission built into the difference between whether you decide a price will increase or decrease. In Spread Betting speak this is known as the bid-offer spread. This of course in practice means that the more you trade the more costs are involved. Spread Betting is, however, free from capital gains, income, and stamp duty taxes. This is why it is popular.
- Immediate Dealing: All wagers are between the Spread Betting company and you so they almost always get approved immediately. There is no broker to go through, no exchange to trade through, no having to wait to find someone willing to buy or sell at the other end at the price you want.
- Extended hours: In most cases Spread Betting companies are open outside the traditional opening hours of the markets. This means in practice being able to Spread Bet 24 hours a day, at least 5 days a week.
That’s a brief list to start. There must be downsides though too, right? Well the main one I can see is you can lose more money than you started with if you are not careful. Let me explain. With a trade you buy, for example, shares. Lets say you buy ten shares at £1 each, total investment £10. If those shares go up in value to £1.20 per share and you sell them you get back £12, £2 profit. Lets ignore broker fees and taxes for now. If those shares go down to £0.80 and you sell them, you are left with £8, a £2 loss. With Spread Betting you wager a specific value per point of movement. Lets say you think the GBP will rise against the USD. You wager £1 per point, and the GBP goes up 50 points. You have potentially made £50 from £1. However, if like on 24th June 2016 the GBP/USD market opened at 14881 and closed at 13679, the value of your GBP would have dropped 1202 points, losing you potentially £1202. This is why in the Spread Betting game, stop losses are important. This basically means if the market goes in the wrong direction from my wager, how much am I willing to risk losing before I cut my losses and close the trade, instead of waiting to see if the market changes and moves in my favour. It is for this reason I also think it sensible to decide how much you want to win before closing the trade. Markets can look like they are moving in the right direction, and then suddenly change their minds and move the opposite way.
Of course the next question is, what’s a sensible exit point on wagers, both in terms of winning and losing. I guess that to some extend that depends on the volatility of the market. The GBP/USD market moves on average about 120 points a day, whereas the AUD/HKD market could move over 500 points a day. You have to remember that whatever timescale you are checking market charts in, to attempt to predict future market directions, the actual price of the market changes every second. It’s all a bit complicated really, and certainly not for the faint hearted. It’s not just a simple black or red roulette bet. You definitely need your wits about you and a proper staking plan.
Ok, so i’ll try and explain this in practical terms. What is a staking plan? You have £200 spare that you want to use to try your hand at this Spread Betting thingy. Every time you place a bet on a market you will potentially lose a portion of your £200. Lets say, sensibly that you can wager £10, or in other words 5% of your pot. This will give you 20 attempts to try to win the markets. Now, if you are wagering £1 a point, which is the minimum on most Spread Betting platforms, that only allows you a move of 10 points in the wrong direction before your stop-loss kicks in and the trade is closed. £10 loss. At 13.10 today in a 5 minute window the GBP/USD market moved 17 points from a high of 12516 to a low of 12499. That’s a move of 17 points. It would appear that the stop loss is not big enough here to cope with the volatility of this market. It’s true that there are the occasional companies out there that will offer 50p per point or even 10p per point spreads, but these are not the norm, and I would check closely the conditions attached. Is it for a limited period of time for example.
So, back to my original £1500. Well feeling like a potential lamb to the slaughter here, I would not want to risk more than 10% of my pot to experiment with this market, and it seems like that would not be large enough to cope with the vagaries of the market in this instance. If you do have a larger pot to play with than me, and think that this is something that could interest you going forward, these would be my words of advice:
- Research different methods of predicting trends in the markets. There are loads of books, and sites out there on the subject.
- Most importantly, test out these theories, because that’s what they are, by opening up a demo Spread Betting account.
- Only once you have successfully implemented a strategy with a demo account should you attempt to spread bet live.
- Be prepared for it to still go wrong when you go live.
I’m still interested in the idea that I can make money from the markets. I don’t however, want to have to spend my whole day, such as it is, staring at price movements to see if my theories will prove practical. If I haven’t got the cash to warrant playing the spread betting game, no matter it’s appeal, I need to leave time to explore other income avenues.
I haven’t completely given up hope here yet. There is one more area to look at here, and that is the little brother of Spread Betting, Binary Trading. More on that next time.
Health, wealth and happiness to all.