Why do people see it as any different from holding a share in a normal account?
I’m a little confused about people’s perception of spread betting, winning and losing is pretty much the same as owning the stocks, the difference is you are probably quicker to crystallise profits or losses.
For instance if you are confident that Ryanair’s stock price is going to over the next 3 months, you can buy on a March market, set a stop loss (guaranteed if you like) to limit the potential downside and bet an amount per point movement, with €10 a point being the same as owning 1,000 shares.
So if Ryanair rises 15 cent you are up 150 quid, if it drops 15 cent you are down 150 quid and if it drops to your stop loss or if at 31 March it hasn’t hit the stop loss but isn’t in profit you stand to lose, at the same time you can take a profit at any time between then and march at the click of a button. The only way physically buying shares makes you less likely to lose is that you can hang onto them indefinitely, like all the people who watched AIB and BOI drop to near zero…
Perhaps the only difference is that spread bets are a leverage product that is dangerous in the hands of the unwary. And of course if you hold stock for the long term there are no ‘holding charges’ unlike with spread betting – but then why do you persist in holding a stock if it continues falling in value?
As for leverage – well, it doesn’t have to be that way. Don’t use leverage but bet in equivalent share purchase sizes. It makes using a fixed £x initial stop so easy to monitor.
Spread betting against shares…. That seems to come up a lot. As long as you are not too leveraged up it shouldn’t matter. This is really more of a psychological problem than anything else. One way to get around the problem is by turning off the account balance on your trading platform when you have open trades.
When I open a spread bet I basically ask myself what would I invest if this were a share, then using the market cap I calculate the amount so if I want to invest £100 and the share is 100p then I bet £1pp – exactly the equivalent risk of buying £100 worth of shares. I then set my stop and my limit and leave the share to it. Most of my spread bets are 3-6 months. I just can’t see why people don’t use them, it really makes no logical sense to me. The only case is if possibly the share price is very high say 2000p and your min bet is £1 so your risking £2000 where you’d normally only want to risk £500 (guaranteed stops then?).
Let’s try to work with this logic:
Say I normally buy £1000 of shares in a company, and my acceptable loss is 10%, so £100. If I wanted to take out a spreadbet in a company instead with the same set up, I take the share price, let’s say £1.31, take 10% from it, so 13.1p, and I calculate that 100/13.1, is 7.6. So I could bet £7.60 per point, and that a 13.1p drop, which equates to a 10% drop, would give me the same £100 loss.
You don’t get quite the same flexibility with spread bets as you do with buying shares unless your spread betting provider supports fractional bets. In our example of £1000 share purchase it will depend upon the minimum bet size offered by the spread betting firm and the margin/deposit. The company will base that on a stocks liquidity. As an example IG Index offer £1pp = £100 of shares so for a £5.00 share your £1pp = £500 share purchase so you might decide to bet £2pp. You would place your 10% stop at a share price of £4.50 when you open the bet – i.e. the stop is share price related not stake related.
The advantage of allowing fractions of a pound is that it allows you to pinpoint the risk exposure. For instance, assuming you enter a long spread bet at a price 360, and there happens to be support at 345 so you place your stop at 340p. You are willing to risk £30 on the trade. At £1 you are risking £20, at £2 a point you risking £40, which is more than you are willing to put at risk on the trade. Thus, a spread bet at £1.50 a point would have matched your risk with the bet size. Likewise, the ability to place fractional bets allows you to exactly match the long and short side when trading pairs. City Index is one of the few providers that allows fractional bets – don’t know why more spread betting platforms don’t support it.
Note: I still use share purchases but mainly for long term investments, larger size purchases and companies not covered by the spread betting firms. Imo for those starting out with small pots there’s no harm in using £1pp and limiting bets to companies of a specific maximum size share price.
You don’t have to use leverage if you don’t want to. If you want to deposit enough monies in your spread betting account to cover the shares going to zero then you can do that. So leverage in this respect is something you fully have control on…