Do you have a feel for the stock market but no wish to deal with brokers, tax calculations and other complexities? Spread betting might be for you, but you should read a little about it first. The risky practice involves getting exposure to price action without putting money down, a dream for many quick and casual traders.
Spread betting has been a big hit in recent years despite its illegality inside the United States. A financial spread bet is, at its core, a mix between betting on a horse and investing in a stock. You make a direct closed gamble on stock prices without actually ever buying a share on the market. This is usually called a derivative, and big banks use what are essentially the same mechanisms to bet on everything from the housing market to the price of cobalt.
How does spread betting work?
You make an agreement to bet on a security, lets say oil, at a sum, let’s say $1000, and decide what each point change is worth, let’s say $1. You’ll also need to pick an expiry date as these contracts don’t run indefinitely. A point is an arbitrary value that can change based on the security traded. For this case let’s assume that one point is a one cent increase in the price of oil. That means you can earn $100 if the price increases by $1.
A spread-betting broker offers you a buy/sell price on the deal, the same way a stock broker would, and you invest your $1000.
In a winning case the price of oil increases by $10 and you double your money: ($10*100 points per dollar=$1000). In order to make $1000 on a $10 increase in a barrel of oil through traditional means you would have to have invested $10,000 to start with, and that’s not taking into account the taxes, commissions and charges that you’ll encounter.
If the price of oil drops by $10 you lose all of your money, however, and if the price drops $50 you lose more than you invested to begin with.
The buy price will be a little higher than the market average and the sell price a little lower, allowing the spread bettor to earn its revenue from those margins. That means that if the market price on a Brent contract is $50, the spread bettor might offer you it at $51.
Spread bets are generally much cheaper than investing on the stock market and they carry a much higher reward for successful participants. They also incur no taxes on their winnings if they’re in the UK, augmenting the gains relative to an investment in the stock market.
Through spread betting you’ll be able to invest in markets that are otherwise prohibitive in terms of cost, or nigh-impossible to get involved in with the amount of money you’re working with.
Why would anybody buy stocks again?
With the advent of spread betting and its lower-cost model, it may be difficult to see why anybody would ever buy stocks. The simple answer concerns risk tolerance. A smart investor knows they’re going to be wrong at some point, if not regularly, and balances their risk profile to suit. That means they’re unlikely to lose everything in a single day, and they can’t ever lose more than they have invested.
Risks in spread betting are also increased by exposure to the spread betting company. Some have been around a long time and are relatively trustworthy, but others are relatively new. A spread-betting company could go bust at any time and take your money with it.
Last but not least, not everybody buys stocks to make capital gains. Some traders prefer to play a slower game by collecting dividends and watching their holding slowly appreciate. Actually owning a share also gives you a say in the running of the company, and a vote at the company meeting.
Most of the market for spread betting is in the UK, though some of it takes place internationally through international brokers. Here we list some of the bigger spread betting companies out there. Find one that’s right for you, but be aware of the risks involved in this type of trading.
IG: The inventor of the market, it has 41% of the UK spread-betting market. IG along with the others on this list are regulated by the Financial Conduct Authority.
DF Markets offers spreads starting at just 0.6 points and lets you bet on market indices around the world as well as commodities and currencies.
Spread Co is unique in offering a dedicated relationship manager to each of its clients, and allows newbies to try their luck with a minimum deposit of just £25 and trading at just £1 per point.
Capital Spreads offers an incredible array of resources and tools to improve the trading experience, and hopefully the results. The company allows newbies to come in at a low initial deposit to get a feel for the market and some of the tools on offer.
Finspreads basically invented the browser best spread-betting paradigm and the company still offers one of the best packages around. The company has a large number of resources, and offers tight spreads on a range of securities.