Day trading: ‘The public can’t get hold of anything more leveraged than a spreadbetting account’
Spread betting is not for the mathematically challenged. This is a world of fluctuating odds, leverage, credit limits, stop losses and any number of instruments to adjust the bet to suit your risk appetite.
The way it works means the more you are right, the more you win. Unfortunately, that also means the more you are wrong, the more you lose. Each bookmaker sets a spread for any number of different markets, from financial indices to total goals in a football match, or average house prices.
One of the most popular markets for financial spread betting is the FTSE 100. One day earlier this year, for example, Worldspreads was offering a spread of 4411-4412 on the blue-chip index. If you thought the FTSE would rise that day, you would buy at 4412.
As the Worldspreads market for the FTSE closed at 4435, if you bet £1 a point, you would have received 4435 minus 4412, multiplied by your stake. With £23 of winnings in your pocket, you could have shouted a round.
However, if the FTSE had dropped, you would owe the bookie money. Losses would be £1 for every point it dropped below 4412.
All spread-betting firms offer so-called stop losses, a level at which you want your bet to close automatically. In the example above, if you were keen to limit your losses to £100, as a buyer of the FTSE at £1 a point, you would set your stop loss at 4312. Stop losses are free to activate.
The downside is that if the FTSE fell below that level, only to rally strongly in the afternoon, you would have lost out on any possible winnings.
To start spread betting, you need an account with a spread-betting company. The nature of spread betting means you could lose much more money than you bet with, so there are varying levels of credit checks demanded by the different companies.
Capital Spreads asks clients about their salary and savings, but requires no evidence to back up any claims. That is because it works on a purely cash basis, by placing an automatic stop loss on every trade according to the amount of money the client has in their account.
As a result of the financial crisis, many spread betting firms are moving towards this more risk averse, cash-based model.
Cantor Index has withdrawn all its credit facilities in an attempt to guard against bad debts. Spreadex is one of the few that still offer significant amounts of leverage. To bet on FTSE 100 stocks, its clients pay 5pc of the amount they would spend on shares for the equivalent gains or losses.
For example, those who are putting £10 (1,000p) on every penny movement in a share price will gain or lose 1,000 times the amount they would if they held one share. Their spread bet is equivalent to holding 1,000 shares. Buying 1,000 BP shares would set you back around £5,000. So Spreadex clients will pay an initial fee of just £250 – 5pc of £5,000 – for a £10-a-point bet on BP.
Spreadex runs credit checks …
Read the original article at Telegraph
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