Managing Risk in Spread Betting
Despite the risk that comes with the use of high leverage, spread betting
offers effective tools to limit losses.
Standard Stop Loss Orders - Stop losses orders allow reducing risk by
automatically closing out a losing trade once a market passes a set price level. In the case of a standard stop
loss, the order will close out your trade at the best available price once
the set stop value has been reached. It's possible that your trade can be
closed out at a worse level than that of the stop trigger, especially when
the market is in a state of high volatility.
Guaranteed Stop Loss Orders - This form of stop loss order guarantees to close
your trade at the exact value you have set, regardless of the underlying
market conditions. However, this form of downside insurance is not free.
Guaranteed stop loss orders typically incur an additional charge from your
broker.
The Bottom Line
Continually developing in sophistication with the advent of electronic markets,
spread betting has successfully lowered the barriers to entry and created a vast and varied
alternative marketplace.
The temptation and perils of being
over leveraged continue to be a major pitfall. However, the low capital outlay
necessary, risk management tools available and tax benefits
make spread betting a compelling opportunity for speculators.
Financial betting is sometimes integrated within gaming companies.
There are also specialized financial betting firms, some of which might
also provide financial spread betting and/or CFDs. As financial spread betting and CFD brokers are regulated by the UKs financial regulator the FSA and not gambling commission there are limitations on financial betting they can provide but all the brokers provide binary betting.
Gaming companies providing financial betting include:
Most punters are familiar with fixed-odds betting, where
players bet on an outcome and are given odds based on the likelihood of
that outcome. But another form of sports gambling has been growing in
popularity over the past few years, especially in the United Kingdom.
It's referred to as spread betting, and while the risks are higher than
fixed odds, so too are the rewards. Sports spread betting is based on
the same concept as the stock market, where a Buy Price and a Sell price
are quoted for shares. for example Shell 405 - 410, meaning that the
stockbroker is offering to buy Shell shares from you at 405, or sell
them to you at 410.
Spread Betting is an unfixed bet type that
empowers the punter to predict an outcome of a match or event and back
their judgment against the 'spread' quoted by the sports spread betting
company. The 'spread' is a scoring range created by the sports spread
betting company on a specific event or match. If punters believe this
spread is too high or too low, they can sell or buy accordingly. The
winnings or losses are calculated by the stake multiplied by the point
difference from the spread.
About ten years ago someone had a brainwave and realized
this could be applied to sports. It is hardly surprising that since
then sports spread betting has really taken off. Basically, the punters
will name their stake and decide if their bet will be higher (sell) or
lower (buy) than the point spread quoted by the sports spread betting
bookie.
The advantages of sports spread betting are many and various:
Potential of large wins from small stakes.
You can bet in running.
Markets are more equally balanced.
You can back selections to do badly as well as to do well. i.e. for
example you can bet for a particular player to score or not to score.
The more correct you are, the more you win. (Of course, the more wrong you are, the more you lose!).
It is more exciting than fixed odds betting because your profit can keep going up. e.g if your team keeps scoring!
Once you have opened an account, bets can be placed in seconds either online or over the telephone.
You can close your spread bets when you like. As soon as soon as you
are in profit you can take your money and run. Even before the match or
season is over. This also means that you can cut losing bets early.
Similarly, you can minimise your risk with a stop win/loss.
You don't need to tie your money in the bet unlike what happens in
fixed odds betting where you place your bet and wait for the event to
finish. With spread betting there is no need to pay for the money
upfront - bets are settled when the market is over so you don't need to
have your money tied up for the whole season if you are betting, for
instance on which team will win the Premiership.
Unlike with conventional bookmakers, winning accounts are not
closed. The spread firms make their money on the spread - the difference
in price between what you can buy at and what you can sell at (just
like the bid and offer prices of a stockbroker for a share).
Spread firms in the UK are monitored by the Financial Services Authority, which means your money is always safeguarded.
Disadvantages:
The computations to work out profits are slightly harder. Example: difference of outcome and spread multiplied by bet stake.
Spread trading in futures is as old as the hills, yet it is an entirely new concept for most current traders in futures. In this introductory piece, we will show you that spreads can be the most conservative, safest way to trade in the futures markets.
But first, what exactly is a spread?
A Spread Defined
A spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts. You can turn that around to say it the opposite way: “A spread is purchase of one or more futures contracts and the sale of one or more offsetting futures contracts.Either way you say it, it is a spread.
In finance, a spread trade (also known as relative value trade) is the simultaneous purchase of one security and sale of a related security, called legs, as a unit. Spread trades are usually executed with options or futures contracts
as the legs, but other securities are sometimes used. They are executed
to yield an overall net position whose value, called the spread, depends on the difference between the prices of the legs. Common spreads are priced and traded as a unit on futures exchanges rather than as individual legs, thus ensuring simultaneous execution and eliminating the execution risk of one leg executing but the other failing.
Spread trades are executed to attempt to profit from the widening or
narrowing of the spread, rather than from movement in the prices of the
legs directly. Spreads are either "bought" or "sold" depending on whether the trade will profit from the widening or narrowing of the spread.
As in stock market trading, two prices are quoted for
spread bets - a price at which you can buy and a price at which you can sell.
The difference between the buy price and sell price is referred to as the spread.
The spread betting company profits from this spread, and this allows spread
bets to be made without commissions, unlike stock market trading.
A Basic Stock Market Trade vs. a
Spread Bet
Here we'll cover a practical example to illustrate the pros and cons of this derivative
market and the mechanics of placing a bet. First we'll take an example in the
stock market, and then we'll look at an equivalent spread bet.
For our stock market trade, let's
assume a purchase of 1,000 shares of Vodafone (LSE:VOD)
at £193.00. The price goes up to £195.00 and the position is closed, capturing
a gross profit of £2,000, having made £2 per share
on 1,000 shares. Note here several important points. Without the use of margin,
this would have required a large capital outlay of £193k. Also, normally
commissions would be charged to enter and exit the stock market trade. Finally,
the profit may be subject to capital
gains tax and stamp duty
Now, let's look at a comparable
spread bet. Making a spread bet on Vodafone, we'll assume with the bid offer
spread you can buy the bet at £193.00. In making this spread bet, the next step
is to decide what amount to commit per "point", the variable that
reflects the price move. The value of a point can vary. In this case we will
assume that one point equals a one pence change up or down in the Vodaphone share price. We'll now assume a buy or "up
bet" is taken on Vodaphone at a value of £10 per point. The share price of
Vodaphone rises from £193.00 to £195.00 as in the stock market example. In this
case the bet captured 200 points, meaning a profit of 200 x £10, or £2,000.
While the gross profit of £2,000 is
the same in the two examples, the spread bet differs in that there are usually
no commissions incurred to open or close the bet and no stamp duty or capital gains tax due. In the U.K. and some other
European countries, the profit from spread betting is free from tax.
However, while spread bettors do not
pay commissions they do suffer a bid offer spread, which may be substantially
wider than the spread in other markets.
Keep in mind also that the bettor
has to overcome the spread just to break even on a trade. Generally, the more
popular the security traded, the tighter the spread, lowering the entry cost.
In addition to the absence of
commissions and taxes, the other major benefit of spread betting is that the
required capital outlay is dramatically lower.
In the stock market trade, a deposit
of as much as £193k may have been required to enter the trade. In spread
betting, the required deposit amount varies, but for the purpose of this
example we will assume a required 5% deposit. This would have meant that a much
smaller £9650 deposit was required to take on the same amount of market exposure as in the stock market trade.The use of leverage works both ways, of course, and herein lies the danger
of spread betting. While you can quickly make a large amount of money on a
relatively small deposit, you can lose it just as fast. If the price of
Vodaphone fell in the above example, the bettor may eventually have been asked
to increase the deposit or even have had the position closed out automatically.
In such a situation, stock market traders
have the advantage of being able to wait out a down move in the market, if they
still believe price is eventually heading higher.
Spread Betting Charles K. McNeil, a mathematics
teacher who became a securities analyst
and later a bookmaker in Chicago during the 1940s, has been widely credited
with inventing spread betting. However, despite its American
roots, spread betting is not currently legal in the United States.
Jumping forward roughly 30 years, on
the other side of the Atlantic, City of London investment banker Stuart Wheeler founded IG Index
in 1974, pioneering the industry by offering spread betting on gold.
At the time, the gold market was
prohibitively difficult to participate in for many, and spread betting provided
an easier way to speculate on it.
WHAT IS SPREAD BETTING?
Spread betting is a way of investing in the movement of a particular market – like forex, shares or indices – without actually owning the asset. Spread betting allows you to take a position on whether you think a market will rise or fall, without having to buy the underlying asset. Importantly, spread betting is a leveraged product. This means you only have to put down a small deposit for a much larger market exposure. Betting using leverage means there are significant benefits and risks: your investment capital can go further, but you can also lose more than your initial deposit. Spread betting is flexible as it's possible to take short positions and deal on over 10,000 markets. However, it is important to understand the risks involved and have suitable risk management strategies in place. Is spread betting for me? Spread betting is suitable for: Active traders looking for tax-free profits* Shares traders looking to diversify their portfolios People who are interested in the markets and what affects them Those looking to add flexibility to their investment capital, through leverage. Spread betting enables you to speculate on the movement of a particular asset – like a currency pair, company stock or even an entire index – without actually owning the asset. With spread betting, you predict an outcome, and the degree to which you are right or wrong determines the size of your profit (or loss). Spread betting differs from alternatives such as fixed-odds betting, where you have a simple win/lose outcome and a pre-defined payout or loss. When financial spread betting, the outcome you're speculating on is the direction in which the price of a financial instrument will move. If it moves the way you predict, your profit will grow the further it goes. However, if the market moves against you, your loss will also increase as the price movement becomes greater.
Betting on the price increasing is referred to as going long, while betting that it will decrease is called going short (or ‘shorting’). How spread betting works When you spread bet, you’re betting on whether the price of an underlying asset will rise or fall. The spread There's a quote of two-way price on each market. This comprises the offer price and the bid price. The difference between these prices is known as the spread. If you think a market is set to rise you ‘buy’ at the offer (higher) price, and if you think the market is set to fall you ‘sell’ at the bid (lower) price. When you want to close a bet, you take the opposite action to when you opened it: buying if you sold, and selling if you bought. For that reason, the market price of your asset will have to move beyond the spread before any profit is made. The bet size The bet size is the amount you bet per unit of movement of the underlying market. You can choose your bet size, as long as it meets the minimum we accept for that market. Your profit or loss is the difference between the opening price and the closing price of the market, multiplied by the value of your bet.
Spread betting is a type of speculation that involves taking a bet on the
price movement of a security. A spread betting company quotes two prices, the
bid and offer price (also called the spread), and investors bet whether the
price of the underlying stock will be lower than the bid or higher than the
offer. The investor does not own the underlying stock in
spread betting, they simply speculate on the price movement of the stock.
BREAKING
DOWN 'Spread Betting'
For example, assume that a
spread-betting company quotes a bid of $200 and an offer of $203 for ABC stock
and you believe that the price for ABC will be lower than $200. Since you
believe that the price of the stock would be go below $200, you could
"bet" $2 for every dollar that ABC falls below $200. Therefore, if
the stock price after a week came to $190 you would receive $20, but if the
price was $215 you would end up losing $30.
