Buying and selling shares through a stockbroker is not the only way to play the stock market. Spread betting allows you to gamble on the movement of indexes, such as the FTSE100, or on the price of individual shares.
The bookmaker quotes you a price for a certain date in the future and you bet on whether the actual share price or index will be higher or lower. You can also gamble on exchange rates and commodities.
Financial spread betting started in the 1970s when investors wanted to speculate on the price of gold without having to find large amounts of money to buy the metal.
As with any form of investment, it is important to be aware of the risks associated with spread betting. Volatile market conditions can bring substantial gains or losses, so bookmakers advise their clients to speculate only with money they can afford to lose.
Is spread betting right for you? And what are the important points to consider?
1. What is a spread bet and how does it work?
You contact the bookmaker and ask for a quote on a particular index or share. For example, you may ask for the FTSE 100 in June. You will then be quoted a spread of, say, 6,870 to 6,880. If you think the market will be lower, you sell points. If you think it will be higher you buy points. You then bet anything upwards of Pounds 2 a point. If the market closed at 7,100 and you had bought at Pounds 5 a point, you would win Pounds 1,100. If it closed at 6,800 you would lose Pounds 350.
2. What advantage do bets have over shares?
You do not pay tax on any winnings and there is no stockbroker’s fee or stamp duty.
You can also spread bet on shares that have yet to float, such as internet firms.
For example, IG Index initially offered 350p-360p for Lastminute.com, but revised the spread sharply upwards when investors bought enthusiastically. At one point the spread was quoted at 620p- 630p before settling back to 570p-580p last week.
The other big advantage is that you can make much more money from rises or falls in share prices.
For example, if a share costs Pounds 10 and you bet Pounds 10 for every penny increase, you would make Pounds 50 for a 5p increase in the share price.
3. What can I bet on apart from shares?
You can speculate on anything from sport to politics. There are a whole range of innovative bets, such as the number of corners in a football match or the number of days that William Hague will remain leader of the Conservative party.
4. How much can I bet at any time?
The minimum bet is typically Pounds 2 a point, but the maximum can run into thousands of pounds a point.
Bookmakers either grant you a line of credit or ask you to deposit money.
5. Is there a limit on how much I can lose?
Bookmakers offer stop-loss facilities for those who want to limit their liabilities. You specify a level at which you want your bet to be closed.
For example, if a spread for a share was 150p-160p, you may choose a stop-loss price of 120p. At Pounds 10 a point, you would lose no more than Pounds 300.
But the bet is automatically finished if the stop-loss price is reached – even if the share or index subsequently recovers. Each bet is also monitored in case potential losses exceed the credit limit or the amount held on deposit. The bookmaker will alert you to any dramatic movement in prices. You can then close your position.
6. What can I do if I see that my bet is losing?
Although you may have bet on a price some way into the future, you can take your profits or cut your losses at any time. You contact the bookmaker, get the current quote and calculate your winnings or losses accordingly.
In the Footsie example, if you saw the market rising, after backing it to fall, you might decide to close your bet early. The bookmaker has in the meantime updated its quote to a spread of 6,910- 6,920.
You close the bet by buying 6,920 at Pounds 5 a point, which means there is a points difference of 6,920-6,870. Your loss, therefore, is Pounds 250. If the market rose dramatically before the end of your bet and you wanted to take your profits before any subsequent fall, you could close the bet at the current price and walk away with your winnings.
7. Will the bookmaker offer me any advice?
No. You have to back your own judgment.
8. Is spread betting suitable for everyone?
The bets can be useful for cautious investors as well as speculators. Someone with money invested in the stock market could bet that the market will fall, effectively insuring their portfolio at its current level.
9. How do bookmakers make their money?
The bookmakers build their profit into the dealing spread. They protect themselves against the risk of losing bets by hedging – buying options to cover potential losses. They claim it makes no financial difference whether people win or lose, so they prefer people to win and keep betting.
10. How do I get started in spread betting?
You contact a spread-betting bookmaker and open an account. Bets are made over the telephone and, increasingly, over the internet. You will receive written notification of every bet you make.