Financial Spread Betting Vince Stanzione Sunday Times

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http://www.timesonline.co.uk/tol/money/investment/article6727514.ece?p...

From The Sunday Times July 26, 2009

Place your bets to play the market Spread betting was once the preserve of City traders, but now it is open to anyone for a modest stake Jennifer Hill

Volatility in financial markets has wiped billions off the value of businesses and pension funds — but it has not been bad for everyone, as IG Group, the financial spread-betting company, proved last week. The group, which owns IG Index — the UK’s biggest spread betting platform — announced recession-busting annual profits, up 30% at £126m. Interest in spread betting has hit an all-time high. Once seen as the domain of City boys with the knowledge and risk appetite to gamble thousands of pounds — taking a punt on the direction of anything from the price of a single share or the level of a stock market index to the gold or oil price — it has now moved into the mainstream. Savers and investors, ravaged by historically low interest rates and the recent bear market, are seeking out new ways to make money. “In the past year we’ve seen spread-betting clients jump 50% and overall trading volumes have doubled,” said Asghar Hussain at trading platform Interactive Investor. “We expect the trend to continue. With such low interest rates on offer at the banks and confidence returning to the markets, investors are looking for other ways to grow their capital.” The FTSE 100 index is down over the past one, three, five and even 10 years — losing 26.5% over a decade — and IG chief executive Tim Howkins believes the traditional long-term buy-and-hold investment approach has been “discredited”. About 2,000 customers sign up to its trading platform every month. So, what is spread betting and does it work in rising, as well as falling, markets? We give our beginners’ guide to armchair trading: What is spread betting? It allows investors to place a bet on the movement of a share or other financial instrument without owning it. You can trade on individual shares (HSBC, for example), indexes (the FTSE 100, Dow Jones or Halifax house price index), commodities (oil or gold), currencies (the pound versus the euro or dollar) and interest rates. Punters profit on the difference between closing and opening prices — if they get it right. Say you believe the FTSE 100 will rise. You can “buy” at the price quoted by the spread-betting company for a stake of, say, £1 a point. For every point the market rises in your favour, you make £1. If you place a “buy” bet and the market falls, you lose £1 a point. If you believe an index — or share or commodity price — is overvalued and will lose value, you “sell” the market and profit from falling prices (or lose money from rising prices). What is the ‘spread’? Also known as the “dealing spread”, it is simply the difference between the price at which you can buy and the price at which you can sell. When opening or closing a bet, you buy at the upper end of the spread and sell at the lower. For example, say the FTSE 100 was standing at 4,500.5. A spread-betting company might quote a spread of 4,500 to 4,501. You believe the index will rise, so you buy £5 a point at the upper end of the spread or 4,501. The market rises to 4,601, so you close your trade, and make the difference between the opening and closing price (so, 100 points)

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multiplied by your stake of £5 — £500. If the market went against you to the same degree, you would lose £500. What are the pros? Recent volatility in markets has increased the appeal of spread betting as it allows punters to profit in any market conditions. Spread betters can place a punt with as little as £1 and move in and out of bets quickly, as they don’t have to buy and sell stock. Another big draw is the low cost. It is classified as gambling, which means profits are free of capital gains and income tax, and you avoid 0.5% stamp duty when you deal. There are no fund management fees or broker commissions to be paid either. In addition, spread betting allows you to profit from the market for a fraction of the cost of normal shares. Instead of paying the full face value, you put up a deposit, known as “trading on margin”. A £1 a point bet on the FTSE 100 at Capital Spreads would mean a £30 deposit so, in the above example, you would have to put down £150 compared with a £500 profit. Does it work in rising markets? It’s easy to see the attraction of profiting from falling prices but the FTSE 100 last week enjoyed its longest consecutive winning streak in four years, so is the rise in demand for spread betting over? No, according to Angus Campbell at Capital Spreads. “The stock market might have turned the corner but we’ve seen just how volatile it can be and the ability to sell the market is a useful tool, not only in bear markets — bull markets are not without their turbulent times too.” And the cons? Wild swings in markets also raise the prospect of losses running out of control. You can, however, set up a “stop loss” so that a position will automatically be closed if a share price or index reaches a certain level. Although there is an added cost to this, it means that you can put a floor on your losses (as well as lock in profits). How can I get started? Spread betting is offered by groups such as IG Index, Capital Spreads, CMC Markets, Interactive Investor and Cantor Index, as well as brokers including Hargreaves Lansdown and TD Waterhouse. Some offer demonstration accounts, where clients can trade with virtual funds until they are ready to take the plunge. How much will it cost? You do not usually pay commission or fees but you have to pay a deposit. This varies from company to company and depends what you’re betting on, but is typically around 5% of the total transaction value.

Free Information on Making Money from Financial Spread Betting go to www.fintrader.net

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