As I write this, I’m nursing a bit of a sore head and an empty wallet. In the last four weeks I’ve lost almost £30,000 spread betting for about an hour a day five days a week. So I managed to blow around £1,500 an hour. That’s really quite a chunk of cash. Actually, it’s not quite as bad as it looks. Fortunately, I was betting using a few spread-betting companies’ demo sites. These are simulations of their live betting sites that allow you to practice before you start betting with real money. I realise that I am no financial genius otherwise I would have been rich long ago. However, the fact that I managed to squander so much money so quickly does pose the question – if spread betting seems so easy, why do so many people get completely wiped out extremely quickly?
We’re increasingly seeing advertising for spread betting in investing and money management publications. In the one I subscribe to, four or five different spread betting companies take full-page colour ads each week, outnumbering any other type of advertising. Spread betting ads are already common in the business sections of many weekend newspapers and will probably soon start to appear in the personal finance sections. Spread betting could appear deceptively attractive matka to many savers. After all, money in a bank, shares or unit trusts will at best give us about a miserable five per cent a year before tax. Yet a reasonable run on spread betting can easily let you pocket ten per cent a week – five hundred per cent a year – completely and gloriously tax-free. So spread betting can let you earn in just one year what it would take a hundred years or more to achieve with most other investments.
Spread betters gamble on price movements of anything from individual shares, currencies and commodities to whole markets like the FTSE, Dax or S&P. It is called spread betting because the company providing the service makes most of their money by putting an additional spread around the price at which something is being bought or sold.
Spread betting appears to have many advantages compared to traditional investing:
- You don’t have to buy anything – It allows you to bet on price movements without having to buy the underlying assets – shares, commodities or foreign exchange.
- It’s tax-free – When you buy or sell shares, get paid dividends or receive interest from a bank you will have to pay taxes like stamp duty, capital gains and income tax. Unless spread betting is your full-time job and only source of income, there are no taxes to be paid as it’s considered to be gambling.
- You can go long or short – When you spread bet you can gain just as much whether prices rise or fall, providing you guess the direction correctly. With most other investments, you need the price to go up before you make a profit.
- You can bet on a rise or fall at the same time – If the FTSE, for example, is trading at 5551-5552, you can place two bets, one that it will rise and one that it will fall. These only get triggered when the FTSE actually moves. So if it starts going up, your bet that it will rise gets triggered. Similarly if it drops, only your bet that it will fall is triggered. So it can seem that, come rain or shine, you’ll probably win.
- Huge leverage – If you bet say £50 a pip (a pip is usually the minimum price movement you can bet on), you can easily win four or five times your original bet if the price moves in the right direction. On a really good bet, you can win much much more.
- You can wait for the breakout – Prices on many shares, currencies, commodities and other things people bet on tend to experience periods of stability followed by bursts of movement up or down, what spread-betters call ‘the breakout’. You can place a bet that is only activated when the breakout comes.
- Loss limits – You can put conditions in your bet that prevent your losses exceeding your chosen level should your bet happen to be wrong.
- You can adjust mid-flight – With most bets, such as with horse racing or on roulette, once the race has started or the croupier has called ‘no more bets’ you have to wait helplessly for the result to see if you’ve won or not. With spread betting you can choose to close your bet at any time. So if you’re ahead, you can take your winnings; if you’re behind you can either cut your losses or wait in the hope that things will change and you’ll be up again.
Given all these properties of spread betting, it should be pretty easy to make a fair bit of money without too much effort. If only.
Industry estimates suggest that around ninety per cent of spread-betters lose most or all of their money and close their accounts within three months of starting. There seem to be another eight per cent or so who make reasonable amounts of money on a regular basis and there are around two per cent of spread-betters who make fortunes. I’ve been to a few presentations run by spread betting companies and at one of these the salesman let slip that over eighty per cent of his customers lost money. Even many professionals lose on about six bets out of every ten. But by controlling their losses and maximising their returns when they win, they can increase their wealth.