What is spread betting? An explanation of the derivatives product that caused some interest when it appeared on in the CII J10 Manual – Discretionary investment management.
Spread betting always seemed to us a really risky faddish way of trying to make money and not for the majority of investors. So when it appeared in the J10 manual it actually caused quite a lot of interest. According to research we’ve done here, spread betting became particularly popular after the financial crisis, as people began to look for other ways to make money. Since then investors have backed off; last year saw an 8% drop as confidence was renewed in holding equities, but it still remains an active market.
So what is it? Spread betting is a derivatives product that offers an alternative way to invest in stock markets, currencies, commodities etc. And what’s more profits are currently tax free – this is because it’s actually viewed as gambling and gambling winnings are not taxable.
It’s not for the faint-hearted though and most spread betting firms offer a demo account where you can get used to the way of trading without actually losing (or gaining of course!). This would seem a really sensible thing to do before trading for real.
Once the decision is made to go ‘live’ then a spread betting account is needed. The providers quote two prices – the bid price is the price you sell at and the offer price is the price you buy at. The difference between the two is the spread and the way the provider makes money.
If the bet is for the FTSE 100 to rise then you buy the FTSE 100 at the offer price – you have to then decide how much you’re going to bet – in pounds per ‘point’. If you bet £1 per point and the FTSE 100 rises 10 points then you’ve made £10 – if it falls by 10 points you lose £10.
The provider works off margins – the average margin is around 0.2% of the value of the bet – so you need that much in your account to make the bet.
Any beginner should put in a place a ‘stop-loss’ – this means that the provider closes the bet once it goes against the trader by a certain amount. Bets can be closed before the normal maturity date is reached or it can be rolled over.
All the spread betting providers we looked at have good content on their website – all with easy to understand examples and some with video content too. The biggest risk it seems is inexperience and ignorance; it can involve large amounts of money and for most people this type of betting is a step too far. The Money Advice Website gives some interesting facts such as ‘a study by the Cass Business School reported that only one in five people who take part in financial spread betting end up a winner’ and more worryingly that ‘the UK Gambling Commission found that 15% of spread betters developed serious gambling addiction problems compared to just 1% involved in other gambling’.
As far as J10 is concerned there is only a paragraph of information in the text book so the exam shouldn’t throw up too many questions.
You can get more help with your Investment Exams by clicking on these links:
For CF2: http://brandft.co.uk/cf/cf2.asp
For R02: http://brandft.co.uk/drfp/r02.asp
For J10: http://brandft.co.uk/df/j10.asp
For J11: http://brandft.co.uk/df/j11.asp
For J12: http://brandft.co.uk/df/j12.asp
For AF4 : http://brandft.co.uk/advdf/af4.asp