Introduction to financial online spreadbetting
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Financial online spreadbetting is the hottest growth sector in the UK financial industry. Not surprising considering the British infatuation with speculating (most recently in the housing market). Through online spreadbetting the retail investor has access to trade a wide range of financial instruments that were previously the domain of only institutions and large scale traders. One of the advantages of spreadbetting is its flexibility to trade multiple trading positions in many instruments from a number of countries; trading positions in stocks, bonds, indices, currencies and commodities can all be managed from one central account.
Spreadbetting – but isn’t that gambling?
Spreadbetting is considered to be high risk and as the small print says “Spreadbetting, CFD’s and Forex are leveraged products and carry a high degree of risk to your capital and it is possible to lose more than your initial investment. Only speculate with money you can afford to lose. These products may not be suitable for all investors, therefore ensure you fully understand the risks involved, and seek independent advice if necessary.”
This is true, if you haven’t opened a spreadbet account yet please take my word for it. But besides the warning above, investing, trading or speculating in anything can be dangerous if you don’t know what you are doing. It is no more dangerous to spreadbet as a “short term trader” and monitor your positions closely than to blindly hold stocks for “the long run” as encouraged by institutions the worldover.
Trading in general, and especially highly leveraged products like spreadbetting are all about understanding risk and how to manage it. Get this part sorted out and online spreadbetting is not the nail biting experience its portrayed to be.
Many spreadbetters (including myself) bemoan the term “spreadbetting”. They cite this particularly useful form of trading as a legitimate trading tool with little in common with reckless gambling.
Not so, thinks the UK Government who actually classify it as betting. Semantics aside, being lumped under the same tax status as gambling does have its advantages, no stamp duty to pay and no capital gains tax. Even if you make a fortune overnight! And so professional spreadbetters throughout the UK are probably willing to put up with this public perception if it means more trading profits for them.
Online platforms means there is no need for a broker to execute a trade, and so cuts out the middle man making transaction costs cheaper. Also the ability to “go short”, a term for betting on falling prices, is another major pull of spreadbetting. For the retail investor at least going “short” has been hard or even impossible to accomplish with a traditional brokerage account.
OK so what is a spreadbet and how does it work?
It is always best to start with an example.
After hearing the latest in the financial press that the Public Bank of China is diversifying into gold I want to bet the price of the yellow metal is going to rise. I “go long” or simply “buy” for £1 per point. I can place a bigger size bet, but lets say I am a newbie. That means for every 1 cents rise in the US$ price of gold I make £1 profit.
If gold moves from $940 to $950 in one trading session (quite normal) then I have made £1000. Yikes, not a bad return eh? Not so fast though. If the price falls from $940 to $930 guess what? I have lost £1000.
That’s where analysis comes in; along with other essential ingredients such as market timing, money management and emotional control.
The fact is that trading gold at £1 a point is a large trade for most of us. Unless you are the greatest thing since George Soros, or have a huge bankroll or wish to blow up your trading account in a month that is; the markets that have a high price and large daily swings are probably best avoided.
If you are still convinced precious metals are going up then why not take a punt on Gold’s lesser cousin Silver?
Let us say that on the day gold moves from $940 to $950 silver moves from $14 to $15, buying at £1 a point you have just made £100. Precious metals are just one example. You could be a bull on technology and trade the Nasdaq 100 or may be a bear on UK Sterling and “go short” that currency against the Euro. Or you could trade any specific company’s stock on a host of worldwide stock indexes. The choice really is up to the trader.
Generally speaking bet size runs from £1 up to £100, but this often depends on who you open an account with.
Bets or trades or whatever you wish to call them can be closed at any time you want. Some customers are day traders, and might close a position after 1 hour, taking their decisions from technical chart patterns. Others may be position traders holding anywhere from a week to a month whilst another group may feel comfortable using only fundamental analysis and holding for an even longer time frame.
Another use for spreadbetting is as a hedge for a real stock position. Lets say our trader holds a lot of BP stock that pays a nice dividend but in the medium term they think the price of oil is heading lower. That position can be hedged by shorting BP, or oil in a spreadbet account. This way it avoids selling the stock and maybe losing the right to the dividend payment.
There are other uses for spread betting too. If directional trading is not your thing you could buy one stock and short another in the same sector. Hoping to profit as either the fundamentally strong one rises more than the weaker one, or the weaker one falls quicker than the stronger one.
Spreadbetting is a derivative product
When I first heard about spreadbetting I actually asked the person telling me about it, “What is the point of it? After all you are not actually buying anything?”
Quite true. Spreadbetters merely punt on the price of the financial instrument. If I “buy” gold I am not entitled to take delivery of the metal. Nor will buying HSBC mean I have bought that stock. And forget about that 12% dividend on Canadian Energy Trusts, that’s not going to happen. Spreadbetting is when all said and done just a bet between you and your broker.
Other than the thrill of the trade it is in fact quite pointless. If you are a good trader you can make bags of cash using leverage. The alternative is to use margin on a stock account, but this option would not give you access to the currency or bond markets. And the amazing leverage that spreadbetting offers could not be matched by having even a margin account.
One of the greatest things is that amateur traders can open an account for a very small outlay, alternative products such as Contracts for Difference (CFD’s) often require larger amounts of start up capital and brokers can deny you an account if you have no experience in the trading arena. Spreadbetting in this case is the ideal spring board.
Spreadbetting companies are financial bookmakers
Let’s not kid ourselves about a spreadbetting firm; they are nothing more than financial bookmakers. But; instead of betting on the 3.30pm at Cheltenham punters have the chance to bet on a range of financial markets. And while going into the high street bookies (at least the last time I was in one) seems seedy, almost an underworld type of experience, the world of online spreadbetting in contrast does at least appear to be a tad more sophisticated.
One of the greatest traders around – Jesse Livermore – started in the bucket shops of America at the turn of the 20th century. Spreadbetting can actually be compared to the bucket shops of Livermore’s time. Although, these days chalkboards have been replaced with sophisticated charting and trading software.
The online spreadbetting industry was among the first in the UK to recognize the potential of the internet as the basis for a trading platform; and it wasn’t long before spreadbetting companies such as IG Index and CMC were the main players in a growing niche market. Leaving many of the more traditional stock brokers and banks behind in terms of technology for their clients.
Spreadbetting companies claim to make their money from the “spread” only. The “spread” is the difference between the buy and the sell price when a client opens and closes his position. This is an issue hotly debated by spreadbetters. The broker’s claim they offset their clients bets, this means that should a client win large amounts of money then the bookmaker in turn has hedged his loss in the real market. It is impractical for these companies to hedge every bet that is placed (and who would want to as a lot of clients lose money consistently) but a bookmaker will monitor large bets and their successful clients and hedge accordingly.
Spreadbetting firms don’t want their new customers to go broke (at least not immediately) it’s bad for business and so most go out of their way to offer virtual trading platforms, trading courses and other tools to help a client to develop his or her skills. Some spreadbet companies allow their clients to make really small bets initially (pennies) while the client gets used to the way it all works. While other companies enforce the trader to place a stop loss order even if the trader thinks he doesn’t need one.
Spreadbetting, a growth industry
Personally I love spreadbetting, and have been trading for the best part of a decade. I have had my fair share of ups and downs but in the latter years have experienced a steadily rising equity curve.
I am not alone. Online spreadbetting has become very popular and is still a growing industry. The ease of which you can open an account and the small start up capital necessary to do so have proved a big hit with those who would not normally have been able to trade the markets. Spreadbetting has proved so popular in the UK that many of the traditional stock brokers and banks have now adopted their own online spreadbetting platforms.
According to a spreadbetting whitepaper the average demographic for a spreadbetter is an affluent white male under 45. This is changing as a number of other demographic groups are becoming more familiar with the internet. And as people worry about their pensions many people are wanting to become more “hands on” with their own finances, spreadbetting is becoming the tool of choice among a growing band of retail investors.
Click here to read more on the industry in this spreadbetting whitepaper
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Tags: Financial Bookmaker, Gold, Online Spreadbetting, online spreadbetting, Silver
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