As stockmarkets hit new highs many are turning to Financial Spread Betting to back shares, Indices, commodities and currencies.
Welcome to the world of Financial spread betting. Every day, thousands, perhaps millions, of investors across Britain keep a close eye on share prices.
They want to know what has happened to the shares in BP they have set aside for their grandchildren. They wonder if their Vodafone stock is going to keep paying a healthy dividend, enough to fund this year’s holiday.
And they hope, keep hoping, that the banking shares they bought at what they thought was the bottom of the market are going to come good one day soon.
The most important part of the TV six o’clock news, as far as they are concerned, is the bit at the end telling how the FTSE 100 index closed.
And yet what relatively few of these share buyers do is spread bet. Perhaps they should.
Here is our beginner’s question-and-answer guide to this now well-established industry, one that is plainly here for good.
What is spread betting?
A wager on the outcome of an event where the pay-off is based on the accuracy of the wager rather than the simple result. It’s not just, it’s up (or down), I won. It’s, how much up (or down) is it?
An example, please.
Let’s take the FTSE 100 index. If you bet £10 per point that the Footsie will rise, and it gains 25 points, you make £250 (£10 x 25 points). But if it falls 40 points, you lose £400 (£10 x 40 points). The more the market goes in your favour, the more you make. Unfortunately, the opposite is also true.
That sounds a bit risky.
It is, or at least it can be. Spread betting is what is known as a “leveraged product”, which means you effectively borrow much of your stake.
That can be good — as you don’t have to find the money to cover all of your position —but also bad — because if you get it wrong, your losses can be large.
However, there are ways of reducing the risk. You can restrict your bets only to markets you know about, or ones that are less volatile. You can also limit the size of the stake and you can (and almost certainly should) use stop losses.
Okay, but what is a stop loss?
A stop loss is a way of limiting the amount you can lose on any single bet. You may decide you are only prepared to risk losing £100 on a particular trade.
At £10 a point, you would set your stop loss to close the bet at the level where you had lost 10 points, or £100 (£10 x 10 points).
So what can I bet on?
Pretty much anything in the financial markets including shares, oil, gold,silver,currencies and yes those famous pork bellies! You can also take positions in markets such as politics, sport and even house prices.
But why would I spread bet rather than just buy shares?
Although the losses can be bigger relative to the initial stake, the winnings can be too.
Also, as these trades are classed as a bet, the profits do not attract capital gains tax or stamp duty as they would if you had made the same trade by actually buying the shares.
You can bet on various markets without owning the asset, and you can also profit when prices fall, rather than just when they rise.
Right. I’ll give it a go. How do I do this?
Let’s take the FTSE 100 again, which we’ll say is trading at 6600. A spread betting firm will offer you a spread on that market of say 5980 and 6630 (the spread is where the firm makes its profit). If you think the FTSE100 will rise, you “buy” at say £1 a point at the top end of the spread (6630).
If you think it will fall, you “sell” at the bottom end of the spread (5980). So let’s say you sold at £1 a point.
If you are proved right and the FTSE100 then drops to 5950, you make 40 points or, in this case, £10. But if you are wrong and it climbs to, say, 6650, you lose 20 points or £20.
Anything else I should know before I get started?
It’s better to get some good training first and practice, Making Money From Financial Spread Trading by Vince Stanzione is a good place to start and offers a workbook, DVDs, website and great support all for £197 see www.winonmarkets.net
What about tax?
Profits from spread betting are free from capital gains and stamp duty, unlike dealing in shares. They are also free from income tax unless it is the investor’s sole source of income.
In a nutshell, what are the advantages?
Potentially large returns on small stakes, though the opposite is also true.
Bets can be opened or closed during events, unlike when you bet on a fixed odds basis and have to wait for the conclusion.
The huge choice of things to invest in/take a punt on.
To find out more go to http://www.winonmarkets.net