Financial spread betting: potentially profitable, really risky
| by Andrea Page 02 Jun 2003 Topic: Personal Finance |
|
|
Andrea Page considers whether financial spread betting is a viable option for the private investor How do you make a 1,764% gain in just one year? Apparently by relying more on instruments that enable you to profit even when stock markets are falling, and less on traditional equity investment. The winner of Proshare's latest annual investment club awards achieved this by heavily 'shorting' the FTSE, NASDAQ and other indices, or selling them in the expectation of falls. Financial spread bets are one way private investors can do the same. 'A spread bet is a short term equity derivative and should only be used if you're confident something is either going up or down,' says David Buik at Cantor Index, whose clients have profited from down bets on banking, insurance and pharmaceutical shares in recent months. You don't buy the asset itself; you're simply betting on how far its price will move, staking an amount per point of variation from a price quoted by spread betting companies like IG Index, Financial Spreads, Cantor Index and City Index. Let's say you think a September price quote for XY Ltd is optimistic at 450p sell and 454p buy. Because you think the share price will fall you go short by betting £20 for every 1p fall below 450p. Two weeks later some bad economic news hits XY's share price, and the spread bet quote is now 425p-429p. In order to take profits you buy at 429p, 'winning' £420. Alternatively, you leave the bet open and, in early September, XY's share price is fuelled by an unexpected takeover bid. The financial bookie is now quoting 460p-464p, so you cut your losses at £280 before it goes more than 14 points against you. Spread betting firms quote on UK and overseas shares and stock market indices, as well as bonds, interest rates, currencies and commodities. At IG Index and City Index you can get exposure to the UK housing market via national, regional and even London borough-specific bets. Forward stock market contracts like the FTSE 100 or NASDAQ usually trade once each quarter - punters can close out the bet any time before expiry. Daily cash bets are popular with experienced speculators who trade rapidly in and out to exploit the greater volatility of indices compared to shares. These tend to have narrower spreads and can also be rolled over to the next day quite cost-effectively. The spread between the buy and sell price varies with the expiry date and the underlying share or index - at the time of writing it's around 6p for a daily FTSE bet and 1p on a June Vodafone bet. It's worth shopping around; IG Index offers cheaper spreads of five different popular share bets each week. Jim Morrison at Financial Spreads says that although its spreads are fixed percentages, the actual amount also reflects changes in the underlying share's market price. At present, many IG Index clients are still very short on the Dow Jones, believing it remains overvalued, and there's been plenty of speculative interest in 'takeover stocks' like Safeway and Somerfield. While the proportion of people placing down bets on UK equities has grown over the last two years, David Buik sees signs of a more positive attitude towards certain sectors like media and banking 'for the first time for 18 months'. The flexibility to take very short term positions and to go short just as easily as betting on an upward price move is what makes spread betting an attractive alternative to share trading, says Giles Wilkes at IG Index. Nor are there brokerage commissions and stamp duty, or any capital gains tax on profits. Spread betting firms take a cut from the spread, and may make a small financing charge depending on the bet. The 'gearing' effect of spread betting means you can get exposure to the price movement of £20,000 worth of Vodafone shares without actually committing that much money. Even so, David Buik advises setting aside at least £3,000: 'This is a sensible amount enabling you to have a relatively substantial bet in a share like Vodafone.' To make sure clients don't over-extend themselves, spread bet firms assess the potential risk in each type of bet and multiply that by the stake to arrive at an amount you'll have to deposit in your account. For example, IG Index ranks forward FTSE bets at 300, so to bet £10 per point you'd have to deposit £3,000. The value of all live bets is calculated daily, and if markets move heavily against you, you'll have to top up the deposit in your account. Financial spread betting is accessible and cost-effective, but also high risk. You could lose more than your original stake, and certain bets carry potentially unlimited losses - especially if you short a market which then rallies strongly. However, you can limit risk on both up or down bets by setting a 'stop loss'. If the quoted price moves against you to your chosen trigger level, the spread bet firm automatically closes out the bet at the first available trading opportunity. This does mean that if bad news was announced at 7am, at 8am the FTSE might open much lower than your stop loss level, leaving you open to further losses. With a guaranteed stop loss, the bet would be closed out at your specified price and no lower. These bets are a little more expensive - Financial Spreads applies a seven-point spread for a standard FTSE bet (including ordinary stop loss bets) and 10 points for a guaranteed stop loss bet. But if you bet on a fairly volatile share and specify an overly cautious stop loss, you could end up selling at a loss and then missing out on a quick price rebound. Financial Spreads permits stop losses and 'limit' orders (which can be used to protect gains) however small the bet, as well as minimum bets from just 1p - Cantor's vary from £1 per point on FTSE forward bets to £7 per 10 cent change on gold. David Buik stresses that if you play at spread betting, chances are you'll get burned. It requires gaining real feeling for the ebb and flow of economic and political events and news, and how markets react to them. Whilst, in his view, betting on shares or sectors doesn't require as sizeable a time commitment as speculating on indices, reaping the rewards of spread betting means actively following markets and keeping up with financial news. The profusion of on-line research and data makes this much more viable for private investors. And because leading spread betting firms operate by phone and on-line, it's also pretty easy to track 'live' price fluctuations (usually delayed by a few seconds), and open and close bets at your convenience.
Cantor Index, tel: 020 7894 8800, www.cantorindex.co.uk Andrea Page is a freelance journalist writing on investment, property and lifestyle issues for a range of UK and international titles including Bloomberg Money and FT Expat magazines. | |