Spread betting

lalman

Alot of mates are in a similar demographic to myself - Mid to late 20's, decent incomes (30-50k), professionals and bored...

Afew of my friends have got into spreadbetting via there phone - i have asked a few questions in the last few days as alot 'say' they are making huge amounts of money from it....

From the basic principle it seems like its leveraged gambling... am i correct in that assumption?

Also, if a friend of mine gains say 200 pounds, who loses?

Archi_Bald

lalman wrote: »

Also, if a friend of mine gains say 200 pounds, who loses?

May be another of your friends.

Spreadbetting is not for the faint-hearted and loaded with massive risks. Unless you do arbitrage, but the spreadbetting firms won't let you do that for very long.

lalman

i wont do it - but thanks for the info.

BillJones

lalman wrote: »

Alot of mates are in a similar demographic to myself - Mid to late 20's, decent incomes (30-50k), professionals and bored...

Afew of my friends have got into spreadbetting via there phone - i have asked a few questions in the last few days as alot 'say' they are making huge amounts of money from it....

From the basic principle it seems like its leveraged gambling... am i correct in that assumption?

Also, if a friend of mine gains say 200 pounds, who loses?

A good starting assumption, in general, is that they will not all be winning, and that most will be losing.

People mis-remember the losses, explain them away as aberrations, or a foolish moment of not following their own rules, and remember the up days. Most peope who believe that they are winning will find themselves havig to top up the tradig account from time to time. Winners wodl be gradually taking funds out.

That said, it's not impossible that some are coming out ahead. If they gain, it will be the person on the other side of the deal that loses. In general the spread-beting firm will "sell" you a product at £112 (for example) and "buy" it from you at £110. They will set the price to a level where they have equal numbers of buyers and sellers, at which point they are making £1 on each deal, and don;t care where the price ends up moving to.

It's the same model as being a trader in the city, except that traders are the ones taking the £1 per time in that example, and the customers are the ones spending it.

paddyrg

BTW 'Leveraged' frequently means being able to lose money faster than you can afford to. You can often lose much more than your original stake

jamesmorgan

Spreadbetting, and their close cousins CFD's, are just another way of playing the stock markets. It is easier to leverage up your positions with SB accounts, but it is also possible to do this with normal broker accounts. I personally would not recommend leverage in any stock market trading. Whether you make money using spreadbetting really depends on whether you are any good at stock trading. With current low interest rates, SB dealing can be a sensible way to reduce costs. With a typical SB account you currently pay about 3% interest on any borrowed money. If you deal with FTSE100 shares you only need to put in 5-10% deposit. If you place the rest of your funds (ie 90-95%) in a high interest account that pays 3% then you offset the interest from the SB account. Your only cost is then the slightly higher spread (about 0.1%) in a SB account. In return you don't have any costs (eg broker trading charges, CGT, income tax on dividends if a HRT). If you trade frequently (eg average hold period of less than a couple of months) then spreadbetting is currently likely to work out cheaper than a normal broker account. If interest rates go up this advantage would disappear.

In terms of who win/loses, a typical SB company will first net off customers who are long in a share from those that are short. Any remaining difference is hedged by the SB company taking a market position. In this way the SB company has no real interest in whether shares go up or down - they make most of their money from the additional spread (ie they just want customers to trade frequently). As with all share trading, you make money if someone is prepared to buy a share at a higher price than the one you paid.

You need to fully understand what you are doing with a SB account, as it is a lot easier to make big mistakes. My general recommendations are:

a) Don't use leverage - make sure that any money not required as a deposit, is paying you interest at the same rate as the SB company is charging you.

b) Trade in the most liquid instruments - eg FTSE100 shares as the spread is lowest

c) The more frequent you trade, the higher your costs (through the repeated spread). Make sure you model this mathematically to fully understand the costs of high frequency trading.

d) If you don't trade frequently then you are probably better off using an ISA account

Nice_Weather_For_Ducks

Its stands to reason that overall people lose more than they gain spread-betting, otherwise there wouldnt be spread-betting companies operating!

But if you do go for it, use only money that you can afford and would be OK with losing should the worst happen.

sorcerer

I have done spread betting, but I mainly just broke even really. For me it's too much like gambling. I prefer to invest in companies not gamble with them.


But I heard from one spread betting company that they said, that most people who do regular spread bets eventually lose. The majority of people who actually make money are those who use them sparingly as part of an overall investment strategy.


Also don't forget if people say only put on what you can afford doesn't apply as much with spread betting because you can lose more then invested.


Also it's very hard for people to admit they lose money when investing, so take what your friends say with a pinch of salt. They might say they are making money because they are embarrassed about losing it. (i'm speaking from experience). :-(

thegrind

I use CFDs as a hedging tool for my portfolio so if I decide a share is overpriced then i can make money on the fall and continue holding my actual shares. Sadly most people don't realise the effect of leverage.

For Example:

I go long on 10,000 shares of Tesco @ 3.31 a share.

My total exposure is £33,100.

Yet I only need £996.00 as margin with a 5 point stop.

The price moves in my favour to £3.41 I am in profit by £1000.

But

If the price moves against me to £3.21 I lose £1000

If Tesco went pop tomorrow I would owe £33,100.

Leverage is a powerful tool, but obviously can be devastating in inexperienced hands.

Biggles

thegrind wrote: »

I use CFDs as a hedging tool for my portfolio so if I decide a share is overpriced then i can make money on the fall and continue holding my actual shares.

So you lose money on she shareholding and gain on the spread bet, minus the financing charges. How do you benefit?

If your share price had run a bit ahead of itself, wouldn't you do better to take a little profit at that point, so you'd still have an overall profit even if it went pearshaped?

IronWolf

I use spreadbets to hedge foreign currency exposure as its the cheapest (and tax free) option for me.

I wouldn't use it to 'trade' except with a small amount as a bit of fun.

I would take what other people say they make with a pinch of salt. Maybe theyve only been doing it a week so its luck, or maybe they are lying.

There is a rule in the city about rookie traders, 90% of them lose 90% of their money in 90 days.