Betting on volatility: Spreadbetting on the markets

Wednesday, 16 July 2008 12:00

Financial betting has grown massively in recent years and the latest volatility has led more investors to look at gambling.

Spreadbetting on indices, currencies, commodity prices or individual shares has a number of benefits – primarily there being no stamp duty or capital gains tax along with no commission – but there are risks to consider.

Investors have to know they can lose more than initial stakes if the markets go against them.

However, recent volatility in the markets has brought more people into spreadbetting – looking to make some money from the falling markets.

Asghar Hussain, head of derivatives at Interactive Investor, explains: “The current intraday volatility is proving to be a spread betters paradise.

“The short-term spread betters are out in force.”

However, volatility brings risk.

“Volatility is a double-edged sword. People see greater action, but investments do turn quickly,” explains David Jones at spreadbetting firm IG Index.

Those spreadbetting wager a certain amount for each unit an index or share rises. So if they bet £10 a point on the FTSE 100 falling and it goes down 100 points, they make £1,000.

However, if the market rises – against the bet – by 100 points they lose £1,000.

Betters, though can put in some protection. On bets they can place stops so – for example – if the deal ends if the FTSE 100 falls 200 points and losses are limited.

But even so, more people are turning to financial betting – both those in the City and outside of it.

“We have a broad-brush of clients, from people in the City to those who have never been to London,” Mr Jones explains.

Part of the reason for this is the recent broadband explosion.

Gone are the days when you could only get share prices from the newspapers and investors outside the City were advised to buy the FT on a Saturday before contacting their broker.

Information is now more freely available and real time data is no longer an exclusive privilege.

Traders can now place bets on their mobile phones and keep up to date with their positions.

However, the image of being trapped by your desk watching the movements of indices need not be the truth.

Traders can also pick areas to suit their lifestyles. While currency trading never stops for those wanting to be tied to their screens, you can opt for New York to come home from work to bet, or focus on the UK.

As well as placing stops on bets to limit loses if the index goes against them and betters can take a three-month view.

This does not mean they are betting on the price in three months’ time, but the movement of a share or index over three months, not just a session or a couple of hours. There is also the option to end betting on a three-month level.

While betting on the ups as well as the downs is simple, most betters, however, only look up, explains Mr Jones.

“It is part of the mentality of traders. It is in their mindset” he explains. “They look for gains.

“But betting on prices going down is as simple prices going up.”

Getting started

The key to starting in spread betting is to start small.

If the markets go against you, losses can be bigger than initial stakes, so before wading in it is necessary to be aware of how the whole system works.

Most firms offering spreadbetting provide training programmes and sessions.

Starting small betting just 10p a point means if the FTSE 100 drops 200 points unexpectedly – as it has been doing – only £20 is lost.

“Also start with what is familiar, for example the FTSE 100,” advises Mr Jones

Betting on which way the stock market or certain stocks will fall and by how much should not be your only investment option.

The risks can be high so when considering betting think, remember it should be part of your whole portfolio.

For those put off by the danger of losses growing beyond stakes, there is also the option of fixed bets on the stock exchange.

Ryan Kneale, market analyst at City bookmaker, which offers fixed bets, explains: “With fixed bets the risk of loss is capped, but with spreadbetting you risk losing more.”

While with one touch bets, you can place a wager an index or currency will reach a certain over as much as 30 days – but the shorter the time period the better the odds.

Mr Kneale explained the odds were not set in favour of the bookie.

“We use a complex mathematical model similar to that used on option prices,” he explains.

“It looks at probabilities as well as supply and demand of stocks and is risk neutral so there is no bias.”

Where are the bookies betting?

“I am an avid better and a keen punter,” admits Mr Kneale. “I practice what I preach.”

He explains in recent weeks he has been bearish, but he was coming to the conclusion banks were looking cheap and was not going to bet against commodities.

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