Spread Trading Questions

What is spread trading?

Spread betting (or spread trading) for the private investor is in principle a simple affair. All you have to do is predict whether a particular stock, security, or market, anywhere in the world, will go up or down over your chosen timeframe. If you’re right, you win; but if you are wrong, you lose.

When buying and selling the underlying shares, you are quoted two prices, for example:

Anglo American:

  • 139p This is the amount per share you receive if you sell
  • 140p This is the amount per share you pay if you buy

The principle is the same with spread betting.

You are quoted two prices and you buy at the higher price and sell at the lower price.

Your objective is to correctly predict which way the price will move, so that the price you receive when selling is HIGHER than the price you pay when buying – the difference between the two prices is used to calculate your profit or loss.

The difference between normal share investing and spread betting is that instead of buying a quantity of shares you simply decide how much money you would like to bet per point.

You might decide that Anglo American is due to rise and choose to buy at £10 per point.

This means that when you close your bet you would receive £10 for every point that the Vodafone price rises above the price you paid; similarly you would pay £10 for every point that the price falls below.

  • Price goes up 10p to 150c

Opening purchase value 140c
Closing sale value 150c
Points moved 10 points
Profit per point £10
Profit £100

  • Price goes down 10p to 130c

Opening purchase value 140c
Closing sale value 130c
Points moved 10 points
Loss per point £10
Loss £100

How can I improve my knowledge of financial spread betting?

Thankfully interest in spread betting has increased immensely. This means that a simple internet search will lead you to a lot of great resources covering financial spread betting in depth. Also spread betting companies are increasingly more aware of the appetite for learning amongst the spread betting community and are pandering to this need with seminars, webinars and comprehensive spread betting guides.

Is spread betting gambling?

For those of us who are interested in indices, individual stocks and shares and the movement of markets like commodities (oil, gold, steel etc.) or currency pairs (the pound against the dollar, for example), the question “is spread betting gambling?” will be particularly a pressing one. After all, some of us will live in countries where online gambling is illegal or simply not possible, whereas others may wish to stay away from certain types of gambling.

Spread betting is essentially gambling. Especially when compared to investing in stocks. Yes, you are betting on the stock market, but you’re not buying individual stocks and shares. You place a buy or sell bet, depending on whether you think the market will rise or fall. The outcome decides whether you win money or lose it, and therefore the answer to “is spread betting gambling” must be yes, but it is a unique form of gambling.

Some would say that answering “no” to “is spread betting gambling?” is a dangerous move. This is especially important when talking to new spread bettors, or those who aren’t familiar with how it works. The main reason for this is because the potential for loss is unlimited, unless you place a stop loss (or accept the company’s default stop loss) before you begin. A stop loss is essentially a barrier that you set, to stop the bet when it begins to move against you.

So, is spread betting gambling? Yes! But that needn’t be a bad thing.

Is spread betting for short-term investment?

This form of trading works best for short to medium term trading.  Spread betting is both tax free and leveraged which essentially means that you can bet with as little as £500.  With each quoted market, the broker provides you with a buy and a sell price on each side of the market you wish to trade.  You simply decide the market direction; if you believe the market to rise you would open your position by ‘buying’, if you believe the market to fall you could open the trade by ‘selling’.  The more the market moves in your anticipated direction or against it, the greater the gains or consequent loss.

What is the spread?

Spread betting providers make their money via the difference between the buying and selling prices (referred to as the spread). Whenever you open and close a position you have to cross the spread, which represents the main cost of the trade. The providers price their quotes from the underlying markets and then add a small market-up to the market spread. Some providers are more competitive than others and this is an important factor particularly if you trade frequently or in large size. Note also that the more liquid the market, the cheaper is the cost of dealing.

This refers to the gap between the buy and sell price of an instrument; a trader who is of the opinion that a market’s price will increase would go long (buy) and his profits would increase in line with any increase in that market’s price. Conversely, if a trader who believes that a market is likely to fall would sell and his gains would increase in line with a fall in price of the instrument (of course the opposite also applies and should the market go against the trader this would result in a loss). The actual spread bet is where a trader bets a specific amount per point, for instance, £20 per point. This just means that for every point the market moves in the direction of our trade, we would gain a £20 profit.

Give me a trade example?

Let’s take the case of the FTSE trading at 5,600.  The quoted spread might be 5599-5601.  If you believe the index is going to rise, you ‘buy’ at your chosen stake – say £20 a point.  On the other hand if you expect the Footsie to fall, you would ‘sell’.  The difference from traditional fixed odds betting is that potential gains are not fixed from the outset – they increase the more right or wrong your prediction on the extent of the index move.  If the index were to move to 5,650, you would net at profit of £1000 [50 points x £20] and £2000 if it rose to 5,700 [100 points x £20]. Conversely a fall in the FTSE to 5,550 would lose you £1000 and £2000 if it slipped to 5,500.  As such spread trading is leveraged trading with your stake buying you exposure to a bigger position than would otherwise be possible.  This can be both lucrative and risky as both gains and losses can accumulate fairly rapidly which is why it is important to use stop loss orders to limit the downside.

Is this a bit like exotic options i.e. bet value is same like premium paid in options? And what you lose if your bet is wrong is only that paid value??

No, spread betting is much different from options. The spread is the difference between the buy and sell price, so the added spread is the ‘commission’ that the broker takes. Let’s say you go £10 per point. For each point it goes up you make £10, each point it goes down you lose £10. So, if the price is 6500 and you’re long, the maximum you could lose is £65,000 (if the price goes to 0). So no, loss isn’t limited to a ‘premium’, like with options.

You may be confusing spread betting with binary options where your loss is limited to your bet size. UK clients tend to use spread betting as a form of trading an underlying index, share or currency with favorable tax treatment.

Besides the spread, are there any other dealing costs?

The other main charge is the financing cost linked with trading on margin. With markets based on the futures contracts this is included in the price, but the daily bets incur a separate adjustment each time they are rolled over from one day to the next.

Can you give me an example of the cost of a trade and the period the spread bet is open for?

I use Ayondo. The cost is the spread (+ a small % if you use their limited risk option) and that is it. The spread is slightly wider than the London Stock Exchange, and you can have rolling daily, 3 monthly, 6 monthly or 12 monthly bets.

If you intend to hold for as long as possible then take out the one with the furthest date. This will have a wider spread to essentially pay interest on your margin. If you intend to trade the share rather than hold then you could opt for shorter period or even rolling daily bets- you will be charged interest on your holding if you let your position role, it won’t ever close automatically. The interest isn’t unreasonable, a few percent per annum based on the margin you have borrowed.

Be careful when you calculate your position size that if all goes tits up you can pay up! For example, if the share price were 100p and you bought £100 pp that would expose you to £10,000 of risk – 100 x £100. If you are new to Spread betting have a look at IG because they offer a 6 week course (online) where they email lessons to you, and they also offer a limited risk option which has guaranteed stops so you don’t suffer from slippage should it move against you. The benefits for me are the margin and no tax to pay.

I have 7 bets on at €1 or €2 per point, and I put a stop loss of 10% loss on each bet. My total risk is around €3500. My main concern is that I have too much risked, given the norm of risking only 2% of capital. I would be interested in any suggestions?

You have too many trades on at the same time, remember if you are long the Dow Jones Index, Nasdaq, S&P 500, Fesx, FTSE 100 or any of their components at the same time you pretty much have the same trade on in two different places! Your stop loss should not be an arbitrary 10% figure, why not 8 or 12? On a small account it can be necessary to have a larger percentage risk than say 2%, it sounds a bit of a contradiction given that you need to be more careful than somebody with a larger account, however if you are too tight with stops you will find yourself getting stopped out a lot! In saying that, don’t go bananas and risk 50% on a trade, I’m talking maybe 5%, that’s 20 loosing trades in a row before you are wiped, if you do 20 losers in a row then you have it mastered, just flip everything you do and you’re in business! Try one trade at a time for now, you know about Rome being built and all that!!

Is it okay to trade shares with £1000?

Your pot is just too small to work properly. The dealing costs and stamp will kill you. It might be better to see if you can get your pot up to at least 5,000 which I would consider the absolute minimum you would need to be able to trade. You can certainly get more exposure with spread betting but I’m always wary about advising people to begin their trading career by spread trading as it is so easy to be tempted to utilise too much leverage which can be dangerous.

Spread Betting, is there a market cap limit below which spread betting companies will not allow positions to be opened or is it on a company by company basis?

Most wont do under £50m. GFT and Spreadex do. It seems most spread betting companies, while they’ll do £50mln market cap for UK stocks, won’t do less than $500mln for US stocks, so it’s not easy.

I’m looking for a spread betting company that allows minimum bets of 10 pence on the FTSE100 and other indices. Any out there?

Open the position at £1 (or whatever the minimum), then close 90p of it and leave the last 10p running.

IG used to allow it through ‘Tradesense’ for new clients, if you haven’t had two stints using it then give them a call to discuss, six weeks per each time put onto it. Or ring IG and ask if they will let you do a re-run of the Tradesense program, giving you bets from 10p for 6 weeks.

Alternatively take a look at spread betting ISF – this is the ishares FTSE 100 ETF. You have to deal with the spreads, particularly on longer time frame bets (often better to take close month and let it roll depending on pricing at the time, if you are taking counter trend positions longer months can work in your favour sometimes). Anyway at £1/point this is essentially a 10p/point trade on the index, you can only trade it during LSE hours though. Good luck.

What about financial spread betting and tax?

As mentioned earlier, financial spread betting is currently free of UK capital gains tax and stamp duty. Of course the legal environment could always change, but ‘till then, this will be one of the most attractive aspects of financial spread betting. After all, why bother going through a stock broker, paying commissions, stamp duty and capital gains tax (if you exceed your yearly tax allowence) when you can ‘trade the value’ of shares and other financial instruments tax free. Sounds too good to be true eh? Well there is a worthy note of caution here. Because financial spread betting is tax free, you aren’t afforded any of the tax protection or relief you can have access to when trading other financial instruments…every rose has it’s thorn after all.

I have £2000 and my target is to make £3000 by the end of the year. Am I being realistic in my goals?

How likely are you to make a 50% gain in your first year? Very much unlikely. Can it be done? Definitely. If you are looking to learn about how the markets work you would do well to see it more as a learning exercise than as a trading endeavour. For a purely financial perspective your average waitress is likely to end up making a better hourly pay rate than you when starting out. But if it teaches you a valuable lesson for your financial future, then it could be worthwhile.

While spread betting was not mentioned at all in the Emergency Budget it was changes to the Capital Gains Tax that has industry insiders licking their lips.   From a personal point of view though, the rise in CGT makes spread betting look even more attractive.   While CGT for higher rate taxpayers increased to 28% from 18%, the increase was less painful than expected by many tax experts. Most had predicted the Chancellor would raise CGT to 40% on non-business assets such as shares and second homes, in order to help reduce the UK’s £156bn budget deficit.

City Index have also suggested that spread betting could be a winner of the coalition governments proposal to increase Capital Gains Tax.   Spread betting is currently exempt from all form of taxes, but as an industry spokesman suggested prior to the budget, further tax pressure on other investment tools could boost spread betting: “Because spread betting is not currently subject to CGT, if the government does decide to hike the rate then this could potentially make spread betting all the more popular and draw in new traders who may not have considered the practice before,” Because spread betting is exempt from CGT this means that should you make £5,000 on a Vodafone trade through a spread bet you get to keep all of it.

“Currently, if you had made these gains by trading the actual Vodafone shares, and if you were already over your £10,100 CGT allowance, you would have to pay 18 per cent of your profit – or £900 – in tax. Should CGT rise to 40 per cent, then you would have to pay £2,000 in tax, which may well leave you quite disheartened,”

Do you ever see spread bets being taxed?

Unlikely. Why? Because the majority lose and if spread bets were placed in the tax arena then those losses could be offset against tax and the treasury would lose out. The theory is that changing the law would not be financially beneficial to the treasury. Most speculative private investors lose money, so the argument would be that if you are taxed on your gains, you should be able to offset your losses. Besides, the companies that run the speculative instruments for the private traders make money as do the large investment houses and the treasury gets income from their corporation tax. Suffice to say that if HMRC thought that they could get additional money through taxing spread betting, they would try but as it stands at the moment, they would lose money trying.

Spread betting is tax free, if you were taxed upon profits you would be able to claim on your losses. As 80% of punters fail the revenue would be in a bad place so I believe they defer. I use spread betting companies to avoid CGT as gains over you annual limit aren’t liable for tax.

Is using an online spread betting platform a more risky way to trade the markets, or would it be a better option to trade via direct market access via a broker and buy / sell shares in the more traditional way?

No. It is the leverage coupled with the lack of a consistent strategy (or the discipline to execute it) that is risky.

Personally i don’t see the problem with spreadbetting if you are sensible…

Quite agree! The thing is, most people aren’t sensible. If you simply use an spread betting as a tax-shelter for an investment and don’t use leverage, it can work well.

Given the inherent high leverage how can a trader limit the downside?

This can be done by reducing the transaction bet size and the stop loss distance. Chooose the stake size and stop loss level such that you are comfortable with your maximum risk exposure.

Does this not turn us into “traders” increasing volatility?

Like T20s? depends how long you hold for, contracts can be bought for 1 day, 3/6/9 months. They can roll automatically so there is very little difference to owning a share except you really need to manage your stop losses and margin.

One question I’ve never quite understood – If folks go long or short using spread bets, does it translate to real shares being bought or sold anywhere? My understanding was that these accounts use share derivatives of sorts. Is that right? And do these type of trades move share prices to the same degree as buying/selling actual shares?

I think it depends on liquidity and the size of your spread trade. Let’s say a share like BP. IG will have long and short trades on these that they will offset against each other and will most likely hold the balance in shares (although they don’t have to). Let’s say you decided to go long at the same time I went short. I would essentially be betting you with IG holding the book. A less liquid share then IG may decide to protect their position and buy the stock knowing they can use the wide spread and DMA to ensure they make a profit on a trade. When I opened my AAAM position (didn’t buy in ISA in the end due to possible split) an equivalent sized buy went through plus at the same time (can’t prove it was mine but likely). For reference I have this on a 9 month contract with a view to a long term hold and will likely roll it over when the time comes. I have this position well funded to hopefully avoid having my stop triggered – I am holding as if it were stock.

“Whatever led you to believe that the spread betting company actually owns any shares on which you are placing your bets?” They have to – the spread-betting company, to remove any risk, hedges in the market, i.e. it buys or sells as necessary so that whatever happens to the share price, it is cash-neutral as far as they are concerned. They make their money on a bit of commission and/or a bit of spread. If they NEVER buy or sell in the market, that means the spread-betting company wins whenever you lose, (and vice versa) which is the worst kind of conflict of interest.

‘They have to’ They don’t have to. Like all bookies a spread trading company takes similar risks to its clients. You could argue that overall, by capping position sizes, they’re hedged by diversity. I’d imagine they buy a proportion of shares to hedge and you can often see the nominee holdings relating to positions in say Spreadex. Bear in mind also that all short positions offset those of longs. That reduces the need to buy/sell to hedge. To counter resultant exposure spread betting providers do in general hedge big market exposures with a third party. In a nutshell, where they a spread trading companies is exposed to big losses if a punter’s bet comes off, they place a similar position with somebody else to cover at least part of those losses. In particular for big deals a spread betting company does seem mostly to buy or sell the shares. The price they get for the shares determines what price I get, which always is slightly worse to allow for their commission.

I went long on AHT at 90 a couple of weeks back and should have closed at 1.00 but held too long , My stop was placed at 80 but when this moved north I moved the stop to 88 – Just checked my SB account and I’ve been closed out this morning at 9.28am. The chart on my SB account shows a dip from 95 to 87 at this time and then a bounce back up again. The chart on ADVFN and other charts do not show the dip that low.

I’m fairly new to spread betting and have lessons to learn but I cannot understand why this would be. Is it just the SB company I use applying a massive spread combined with the MM’s playing with the bid price or something else? Looking at the chart over the past few months I cannot see another sudden dip like this.

Unfortunately I’ve heard your story time and time again. You really have answered your own question. That’s why I use wide stops. You revealed your hand to the spread betting company. Suspect the worst and most corrupt manipulation possible and you’ll be spot on. We went into auction for a few minutes this morning which was probably the smokescreen to take lots of positions out. The share price did drop…. but not to 87p. That is taking the piss (pardon my vernacular!). Complain with the spread betting company and be persistent (they are bookies after all) – but if you use wider stops you won’t have such problems. Understand we all get hit and take this one as a lesson learnt.

..to catch out those spread betting with stop losses and enable the market makers to accumulate shares..

I’m not sure to what extent that might work. Spread bet bookies don’t always buy/sell the stock that we punters are betting on – sometimes balancing long bets against short bets and only taking a market position in the unmatched remainder. So a lot of bets closed by hitting stop losses will not necessarily involve any actual shares being traded.

Who would you say are the best spreadbetting firms? Who offers the widest selection of shares and the best spreads?

I find Ayondo to be the fairest provider (they charge financing only on the amount you borrow and pay 100% on dividends unlike other providers) and most useful range and, for me, the most convenient platform – so I tend to look there first. I then check ETX Capital as they may quote a wider range of shares.

How would you like Financial Spread Betting to change?

Over the years Financial Spread Betting has changed – access and the range of trades has exploded, but this ease of access both through brokers lowering conditions for opening an account and the speed of this and the execution of trades – is potentially dangerous. The new trader signs up, deposits some money and can trade. The figures are frightening for those that blow themselves up in a few months. Does the Financial Spread Betting industry need to grow up? Should the brokers be more stringent with new clients? Certainly people should realise that leveraged trading is not the holy grail to untold riches and should start small without leveraging themselves to the tilt!

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