If you were able to attend the Masters of Wealth conference in January you will have heard me talking about how to make some extra money and have a great time doing it. Well, especially for those of you who couldn’t come and as a refresher for those who were there — I am going to go into a little more detail about the exciting and potentially very profitable world of financial spread betting.
More and more people are taking up financial spread betting as a fun way to have a punt on the stockmarket. Make no mistake: spread betting is not truly investment (even though it’s regulated as such by the SFA) — it’s speculation pure and simple. That’s why it’s so much fun.
If you’ve only a fairly sketchy knowledge of spread betting then it can all sound a bit odd. It’s really very simple to understand, and if you get it right you can make a good steady stream of profit. One of the main benefits is that the profits are classified as winnings and are therefore tax free!
FINANCIAL SPREAD BETTING : LIMIT YOUR LOSSES AND LET YOUR WINNERS RIDE
Financial spread bets can be put into two main categories. An intra-day bet only runs during the day in which it is placed until the close of business for that day. For example, if you place a bet on the rise or fall of the FT-SE 100 index, your bet would cease at 16.30hrs on that day when the market stops trading.
A bet placed today on the possible price of an individual share, or index such as the FT-SE 100, at a date several weeks in the future, would run on until that date had arrived. In both cases, it is quite simple to close out your bet at any time after it has been placed, whether the bet is intra-day or for a date in the future.
This facility is most important because it can provide you with a substantial degree of protection. It enables you to arrange a stop-loss level at the time you place the bet. For instance, if you decide that you do not want to become liable for any loss from a specific bet of more than say, £300, you can impose that condition on the bookmaker at the time that you place the bet.
When you go to a race meeting, whether it be horses or dogs, you make one pick from the list of runners which you think will beat all the other contestants in that race, based on some sort of selection process — some more scientific than others! Having made your choice, you ‘shop around’ the bookmakers to see which one will give you the best price about your runner, and you make your bet and the price is fixed at that time for your bet. You know exactly how much money you will win or lose before the race has started.
Financial spread betting is completely different. Instead of trying to find something that will beat all comers, you are making a judgement about the price that you think a share or index level will be at a date or time in the future. For example, if you think that the price of Marks & Spencer shares will be say, 380p in nine weeks time, compared with the current price of say, 280p, you ask the bookmaker for a quote for that future date.
Let us assume that he makes a price of 360p — 370p. The figures he is giving to you are based on what the futures market is quoting at that time. So what you are doing is betting that in your judgement the likely price of M&S will be higher than the bookmaker/futures market thinks it will be. If you feel that the market has got it wrong, you place a ‘BUY’ bet with the bookmaker at say £10 per penny that the price ends up above 370p on the date in the future e.g. June 25th.
FINANCIAL SPREAD BETTING : FANCY A FLUTTER?
If your judgement was right, and the price rose to 380p (or higher) on, or before, that date, you would close out the bet and you would have won £10 x 10 = £100. (Closing price 380p — bet buy price 370p = 10p gain x your stake).
Conversely, if you believed that the price would not get as high as 360p, you would have placed a ‘SELL’ bet originally, and if the share price only rose to 325p, or indeed fell down to a lower figure than its current level, you would win in exactly the same way.
Assuming that your stake was £10 per penny and the share price ended up at 340p on June 25th, you would have won £10 x 20 = £200. (Bet sell price: 360p — closing price: 340p = 20p gain x your stake). However, if your judgement was wrong and the share price moves in the opposite direction to the one you have chosen, you will lose money at the same rate. Let us take the same figures as an example:
M&S share price today: 280p. Spread bet quote for June 25th: 360p (sell) — 380p (buy). If you think the price will be higher than 380p, you place a ‘buy’ bet. If you think the price will be lower than 360p, you place a ‘sell’ bet. You decide to place a buy bet at 380p at £5 per penny. The price ends up at 370p.
You lose (380p — 370p = 10p) £5 x 10 = £50
FINANCIAL SPREAD BETTING : VOLATILITY CAN PAY OUT BIG — USE A STOPLOSS TO MINIMISE ANY LOSSES
Intra-day betting is generally confined to betting on the probable rise or fall of an index, such as the FT-SE 100. It works in exactly the same way, in that the bookmaker will quote you a spread and depending upon your view of the likely direction that the index will take, you either ‘buy’ or ‘sell’ it.
Since the introduction of SETS (electronic trading), the FT-SE 100 has become very much more volatile during the daily trading period than it ever used to be. Movements ranging over 120 points during a day are by no means uncommon. Whilst you stand a much better chance of making serious money during periods of strong volatility, the dangers of losing are commensurately much higher.
You can guard against this hazard by using a stop-loss, and if you are betting intra-day on the FT-SE 100, or the Dow Jones, for example, we recommend that you certainly do so. The reason is because both these indices are very volatile, and sometimes they can move over 100 points in the day.
Obviously if you don’t have a stop-loss in place and you’re unlucky enough to have bet in the wrong direction it could cost you dear. It’s worth remembering, though, that there will be a premium to pay for the insurance of imposing a stoploss, and this will take the form of a wider spread in the price. Nevertheless it must be stressed that we believe it to be an essential safety device, particularly for novice punters.
It is also essential for the beginner to learn the ways in which the bookmakers work. You must understand everything about their terms and conditions, both as to their dealing and settlement systems. If you don’t understand something fully, ask questions until you do.
Financial spread betting can be used for two separate purposes. The two are different and you should be quite clear about the reasons for using the facility.
FINANCIAL SPREAD BETTING : HAVE A PUNT — YOU COULD PROFIT
First, you can use it to hedge against a possible drop in the value of a share that you hold in your portfolio, but which you don’t want to sell. It may be that you believe that the sector, or company, will be out of favour for a time but will recover and you feel that the share is worth holding for the longer term. Or it could be that you would like to sell the share because you believe that the price will drop, but if you dump it now, you could become liable to CGT.
Using spread betting you can lock in the ‘profit’ even though the share price falls out of bed, and avoid any liability to tax. You would place a spread bet on the individual share for as far into the future as possible for protection.
The second purpose — the one I am recommending, particularly for newcomers to the game, is to have a regular and very short-term gamble using intra-day bets on the FTSE 100 or the Dow Jones. It would be simply to have some profitable fun.
Obviously if you are betting on the movement of the FT-SE 100 over the course of a day one of the most useful sources of information you can have is access to real time prices. Otherwise you will always be 15-20 minutes behind the index — not ideal if you see the chart peaking and beginning a rapid downturn and you want to close out your position there and then.
FINANCIAL SPREAD BETTING : REACT FAST AND STAY AHEAD OF THE GAME
Now, getting access to real-time price feeds can be quite costly. In addition, the bookmakers who will quote you a price will not provide advice.
DO shop around the bookmakers and get all their charges and minimum levels of stakes.
DO use stop-loss limits if you decide to bet intra-day.
DO NOT risk more than you can afford, and use that amount as the basis for your stop-loss.
Enjoy it, it can be a lot of fun.
