For many, the attraction of spread betting is not just the simplicity with which you can enter and exit trades as well as play both sides of the market, but more importantly is the depth and range of spread betting markets that are now available. When the industry was in its infancy back in 1974, the only market then available, and indeed the one that spawned the original idea of spread betting was in gold. Until then, commodities and commodity trading had been the preserve of the professional trader in the square mile, and it was the insight and vision of Stuart Wheeler who saw the opportunity to offer an index or prices in gold which others could bet on using simple spreads. Since then the spread betting industry has expanded and diversified into markets that, like gold, have tended to be those only professional traders could access, such as options, indices and futures. Indeed many of these are still difficult to access if you are a retail trader, and with the tightening of regulations by the FSA in recent years, trading in options or futures for example is almost impossible, unless you have several years experience, with brokers now required to ensure that new clients have the relevant trading experience. Trading in these instruments online is no longer as easy as it once was, and this is where spread betting is a winner. It allows you access to all these markets and more, all from one trading platform. So what are the markets that are available to us – let’s take a look.
Spread betting indices
The indices are one of the most popular and liquid markets, and in general most spread betting companies will offer a diverse range, covering all the major exchanges around the world. The most popular are of course those such as the FTSE 100 , the Dow Jones, the Nikkei 225, the Dax and the STOXX, but there are many others, with some spread betting companies now quoting prices even when a particular index is closed. The reason for this is that many of the index prices quoted are based on the underlying futures market and not the current cash price – there are several reasons for this and I have recently added a new site which explains all you need to know in order to get started in betting on the FTSE 100 ( and other indices ). Indeed it is important to understand that prior to the development of the spread betting market, such products were the preserve of the futures industry, where index contracts are traded daily on the futures exchanges, such as the NYSE Euronext ( originally LIFFE ), which now operates many of the futures exchanges throughout Europe. As such, the futures contract prices are updated second by second as buyers and sellers enter the market, whereas the FTSE 100 index itself is only updated every 15 seconds( far too slow for financial betting) and is simply an indicator of share price movements which are then converted by weighting into the latest index price. It is also important to realise that the futures market leads the cash market, and not the other way round. Spreads on the major indices are normally around 1 to 2 pips for the daily bets with most spread betting companies offering both daily bets which expire at the end of the trading session, as well as rolling bets which you can roll forward into the next trading session. These of course carry a small premium to allow for rollover and the cost of the carry.
Spread betting shares
As you would expect, shares and equities are again a very popular area for many traders, with the simplicity of selling short, the main attraction. Until the advent of spread betting this was impossible for small retail traders, unless you had a margined account with an online broker, but even then it was ( and still is ) a complicated process, with the shares or stocks being borrowed by the broker on your behalf, purchased by you, and then sold back on exit from the trade, with the shares then passed back to the original owner. Any dividends that became due whilst renting the shares were then liable to be paid by you to the existing owner. All very complicated! Of course there were other ways to effectively short a stock or share using options, but again these were ( and still are ) considered to be high risk instruments, even though their original use was as a hedging mechanism. So, with the advent of spread betting this has now opened the way to trade both long and short in the share market easily and quickly. Most spread betting companies offer a wide range of markets, in particular the UK, US, Europe, Canada, the Far East and Australia.
Whilst betting on shares is one of the most popular markets for spread betting, it does highlight the dangers of spread betting in general, and one that is often forgotten in the haste to get started. Put simply it is this – if we take a share such as Tesco plc which might be trading in the cash market at 300p and the company is offering a spread of 301 – 302, then to trade this at £10 per point, and based on a margin requirement of 10%, you would need to have a margin deposit in your account of £302. This reflects the fact that your total exposure to the market is the same as if you owned £3,020 worth of shares ( a 1p movement in the cash market = £10). In effect you are only putting up a small amount of money yourself, and borrowing the rest from the company. So when going long or short in shares, just remember what this equates to if you were holding these as physical shares in the cash market, and it will make you appreciate how much money you have at risk on each trade.
Spread betting commodities
This is another market which has now opened up thanks to spread betting with all the major commodities now widely available. As with indices, this market was largely restricted to those professional traders in the futures markets, until recently. The most popular commodity markets are of course the high profile ones such as precious metals including gold and platinum, oil ( WTI, Brent Crude etc ) and industrial metals such as silver and copper. More recently some of the spread betting firms have introduced the ‘soft’ commodities to their portfolios, such as coffee, cocoa, sugar, cotton, and wheat, so it is well worth checking if these markets are of particular interest, as they are now becoming more widely available.
Forex spread betting
The biggest market for many spread betting companies, following the dramatic growth in trading the spot FX markets by retail traders in the last few years. Whether you choose to trade using a spread betting company, or an FX broker, the currency pairs offered, and the spreads, will be very similar as the quotes are so competitive. Where they may differ is in whether you prefer trading using direct market access, often called an ECN broker, or are happy with a spread betting company where you will be trading against the company itself.
Other financial spread betting markets
The markets outlined above are by far the most popular, but there are others, which are now slowly gaining ground, and these include bonds, futures, options, interest rates and sectors. Naturally all of these are more specialised and require more detailed knowledge of the underlying instruments and markets, but all are worth considered for your future trading. The only one of these I use myself at present is the sectors betting, which provides spreads on the common sectors for shares and equities, and I use this as one of my spread betting strategies which I will explain shortly. Briefly each share or equity is classified into a sector by the exchange, allowing the spread betting company to quote a price as to whether a particular sector is likely to do better or worse over time. All these sectors can be found at the relevant exchange and if you would like further details for the FTSE 100 then simply follow the link to here to find out more from the London Stock Exchange.
Now lets move on to look at our financial spread betting strategies and the key to it all.