Spread
betting allows investors to bet on the future direction of the FTSE without
having to purchase shares in individual FTSE stocks or index funds. Instead of
buying a FTSE 100 index contract at a predetermined, fixed price, the investor
can decide how much to risk, just as he would if he were placing an opening bet
in a game of poker. FTSE spread betting is a form of investment that comes very
close in structure and execution to traditional gambling. For instance, an
investor could "bet" 2 pounds per point that the FTSE would rise. If
the FTSE rose 50 points after the investor placed the bet, then he would have
"won" or gained 100 pounds, 2 pounds for each point of the FTSE's
gain. If, on the other hand, the FTSE dropped 50 points immediately after the
investor placed his bed, the investor would lose 100 pounds. Spread betting can
be an effective way to make money in both up and down markets. For instance,
investors who place bets on the direction of the FTSE can just as easily bet that
the index will go down as that it will go up. Thus, the investor in the example
above could also bet 2 pounds per point that the FTSE would drop. In that case,
he would lose 100 pounds if the FTSE rose 50 points and gain 100 pounds if it
went down 50 points.
The
Advantages of Spread Betting:
FTSE
spread betting offers many advantages over traditional trading. It is not for
every investor, but those who do engage in it enjoy many rewards, financial and
otherwise. Among the most obvious benefits of spread betting is the avoidance
of capital gain tax, income tax, and stamp duty on investment profits. In
addition, investors need not put up as much cash to place a spread bet as they
do to purchase traditional market shares. Investors can engage in spread betting
with very little capital. Some spread betting companies allow investors to
place bets with as little as 100 pounds in their accounts and to bet as little
as a one pence per point. Spread bets are commission free. This is because
companies that offer spread betting build the costs associated with placing a
bet into the bid-offer spread that they advertise to potential investors. Thus,
while it would be wrong to say that investors are able to place spread bets at
no cost, they are better able to gauge and absorb the costs because the costs
are announced up front rather than taken piecemeal from investment accounts
with the commission of each transaction. The upfront, one-time only assessment
of investment fees allows the investor to perform what is known as a
"phased exit" without incurring additional costs as a result. That
is, a spread bettor can unwind the bet little by little in several transactions
without being charged an extra commission fee with each sale. Spread betting
also has psychological rewards. It enables investors to make their own
decisions and take direct control of their investment activities. It also
introduces to the usually stodgy activities of investment the sense of
excitement and fun associated with gambling.
Disadvantages
of Spread Betting:
However,
spread betting truly is a form of gambling, and, as such, it can be a risky
activity. Because a spread bet is a highly leveraged form of financial
speculation, an investor stands to either realize great gains or incur great
losses. While there is the potential to win big profits through this unique
form of investment, there is the possibility of losing big as well. Also,
because a spread bettor does not own shares in the underlying investment
instrument, he also does not enjoy the benefits that come with ownership, such
as receiving regular dividends and having a voice in the governance of the
corporation or corporations in which shares are owned It is true that investors
are not required to pay capital gains when they make substantial profits
through spread bets. Conversely, though, when they lose big, they are precluded
from claiming a capital loss that could potentially offset taxes assessed
against gains from traditional investments at tax filing time. Spread betting
is generally best viewed as a short-term investment strategy that allows
individual investors to take advantage of short-term fluctuations in market
indices. Thus, it is not an investment vehicle suited to "parking"
one's money for an extended period of time. Spread betting requires vigilant
monitoring and active involvement on the part of the investor.
How to
Minimize the Risk of Loss When Engaging in FTSE Spread Betting
Fortunately,
spread betting differs from traditional gambling in that it is possible for an
investor to minimize his exposure to potential loss while still maximizing his
potential gain. Losses can be limited most effectively by placing a stop-loss
limit order, which allows an investor to determine the maximum amount of any
loss he will incur before placing the bet. A savvy investor will structure the
bet so that he automatically exits the bet once the underlying instrument that
he is betting on reaches a predetermined price. Exiting the bet at this point
limits the losses that the investor may incur if the index moves in the
direction opposite to his expectations.
How to
Choose a Spread Betting Company:
Spread betting
originated in the United Kingdom in the mid 1970s and remains a popular form of
financial investment and speculation in the British marketplace. Many firms
offer spread betting services to investors. There are many factors to consider
when choosing when deciding which spread betting company to trade with. One of
factors to consider is the range of the bid-offer spread offered by different
spread betting firms. The tighter the spread the better. Depending on how much
money an investor has on hand and is willing to bet, the minimum amount needed
to place a bet and the minimum price per point may be key to choosing the right
spread betting firm. Some firms allow investors to open credit accounts and
place bets on margin, while others do not. Newcomers to the field of spread
betting may wish to open an account with a firm that offers a free demo or
trial account with simulated trading systems. Such newcomers will also want to
examine the training and educational materials that each company offers in
order to guide new investors through the process of spread betting. A
critically important consideration is the ease of using the software systems
and trading platforms through which a spread betting firm provides investor
information and through which investors execute trades and enter bets. A firm's
trading platform should perform seamlessly and process orders efficiently and
instantly, even during times of heavy traffic and hectic trading and betting
activity. Some of the better known and regarded spread betting firms include,
IGIndex, City Index, Finspreads, Capital Spreads, CMCMarkets, Sporting Index,
and Saxo Spreads.
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