In many ways, spread betting epitomises the City of London and its workers; it’s a high-risk, high-reward, tax-efficient way of gambling on almost anything the human imagination can invent.
Loaded with confusing jargon, the industry can feel like a closed shop to outsiders, with its talk of going ‘long’ or ‘short’ and ‘holding a position’. Even to the world-weary gambler, its use of trades rather than bets can make it seem inaccessible. But, in truth, the reality of spread betting is not all that dissimilar to ordinary gambling or many investment techniques; money is put at risk in the expectation of a certain outcome occurring and producing a resultant return on the investment.
So What is Spread Betting?
Spread-betting firms offer a prediction or ‘spread’ of where they believe a particular share or index will close at a given time. Individuals can trade or bet on the accuracy of their estimation. If they think that a prediction is too low, they can ‘buy’ on the price. If they think it’s too high, they can ‘sell’. For a more in-depth explanation, take a look at the online resources provided by spread betting providers such as Spread Co.
This principle can be applied to literally any activity. For example, during the recent Budget speech bookies offered spreads on the number of times Chancellor Alistair Darling would say ‘sorry’ or take a sip of water. If the trader thought the prediction was too low or high, he or she could place a ‘long’ or ‘short’ bet.
Such novelty bets have always attracted a lot of media attention, but the primary role of spread betting lays in the financial sector, where people place bets on shares, commodity prices or interest rates. For example, imagine that Sainsbury’s opens the day at 358p. You want to speculate on the movement. You see a quote of 355p to 356p, but you think the share will end higher. If you place £100 per penny movement at 356p, and Sainsbury’s ends the day at 362p, that’s seven points higher than the firm’s buy price, meaning that you win £700. However, if Sainsbury’s finished the day down five points from the buy price of 356p, you would have to pay £500.
What’s the Attraction of Spread Betting?
Spread betting has many advantages over directly investing in shares. Gains are tax-free, exempt from stamp duty and, considering the large outlay, the capital required can be relatively minor, which is particularly attractive to traders operating in the current financial environment. To create the same exposure outlined above by buying Sainsbury’s shares, the investor would have to part with tens of thousands of pounds.
However, if this sounds too good to be true, that’s because it is. Large exposure for a small sum of money can lead to huge gains, but it can also incur astronomical losses. With some spread-betting companies requiring deposits from as little as 3pc of the equivalent direct investment value, it requires little more than a marginal movement in share prices in the wrong direction to leave the punter owing substantial amounts of money to the bookie. Although spread betting companies are unanimous in stating that they are happy to have winning clients, this does not mean that they’re on your side; in the financial world, everyone knows that for every winner there must also be a loser.
