As the UK spreadbetting industry begins to mature, Jenny Lowe asks what novice traders have learnt during turbulent markets...

The spread betting industry has worked hard to improve its image in recent years. It offers a tax-free and efficient way of trading the price movements of thousands of financial markets including indices, shares, forex pairs, commodities and more.

Spread bets can be used to speculate on price movements irrespective of whether the markets are rising or falling. This means that spread betters are able to ‘go long’ (buy) or ‘short’ (sell) on market prices.

Leveraging up
For every point that the investor is right, or wrong, in their prediction they win (or lose) a multiple of the initial stake.
For example, if you believe that the FTSE 100 index was heading for a rally, you could either place a rolling bet on the daily movement of the index or take a longer-term view by betting on its likely level in a few weeks or months.
Andrew Mackenzie, marketing manager at Spreadex, explains, ‘The concept may initially appear daunting, but the basic principle of trading by “buying” or “selling” an interest in the price movement of global shares or the world markets is relatively simple.

‘Spread-betting firms offer a prediction of where they think a particular share or index will close at a given time, allowing individuals to trade or bet on the accuracy of that estimation.

‘People who think a prediction may be too low can “buy” on the price, whereas those who think the spread is too high can “sell”.’

And given the current economic environment – not only in Europe, but in the US, the UK and Japan – there are increasing opportunities for investors to make money by betting on the direction of the respective markets.
According to Darren Hepworth, trading and customer services director at TD Waterhouse, investors managed to make ground during the panic that followed the Japanese tsunami. ‘The Japanese economy has limped through the past few decades and only recently shown signs of a return to optimism,’ he says.

‘The government now finds itself printing a further ¥10 trillion to reassure the export trade and relying once again on its people to finance the relief effort.’

Short-positioned traders have been locking in some profits and waiting, according to Hepworth.
The attraction with investing via this form of speculation rather than directly in shares is that gains are tax-free, there is no stamp duty payable and, for a large outlay, the capital required can be relatively small, which is particularly useful in the current financial environment where debt is hard to come by.

Getting it wrong
However, making money is not without its risks, and the attraction of relatively small sums for a large exposure can also lead to huge losses. With some spread-betting companies requiring deposits from as little as 3 per cent of the equivalent direct investment value, it needs little more than a marginal movement in the share price in the wrong direction to leave a glaringly obvious hole in the investor’s pocket.

It is for this reason that investors should utilise a ‘stop-loss’ facility, whereby a bet is automatically closed if a share price reaches a certain level, effectively limiting any loss.

Nick Raynor, investment adviser at The Share Centre, says, ‘Setting a stop-loss limit is crucial if you wish to minimise losses, and investors should be strict when it comes to setting limits and target prices.
‘Remember, prices generally move in accordance with supply and demand, not statistics, and past performance is not necessarily an indication of how markets will perform in the future.’

Jenny Lowe is a journalist with the Financial Times Group