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Ordinary punters take a gamble on financial spread betting
SPREAD BETTING has not had a good press. In sport, it is inextricably linked to match-fixing, as with the Hanse Cronje affair. The less well-known financial spread betting is still seen by much of the population as a complex, dangerous and dubious practice best left to the Nick Leesons of the City.
But the explosion in investment on the stock market by ordinary punters, albeit muted by the implosion in high-tech stocks such as lastminute.com, is helping financial spread betting to a wider customer base. The serious investment magazines are taking an interest and a number of day traders on the stock market, who make their livings from shares, are adopting it in favour of screen-based dealing.
The main problem facing the five main firms that offer financial spread betting, gambling on movements of individual shares, stock market indices, interest rates and other financial instruments, is explaining in a few words just how it works.
Perhaps the best attempt comes from the market leader, IG Index, in the brochure it sends to potential customers. "We make a quote for the price of the share on a given date in the future," IG explains.
"You decide whether you think the share will be higher or lower by that time."
Punters who think the shares will be higher place an up bet, so "buying" the share at the quoted price. Conversely, if you think the price will fall, you make a down bet, so "selling" at the quoted price.
IG gives the example of the punter who thinks that Marks & Spencer shares will fall by December 14 - a good bet over the past two years. IG quotes a two-way price for a given date at 290p/295p. The punter "sells" M&S at £10 per point. This means that for every penny M&S has fallen below 290p at the given date, the expiry date, the punter makes £10. For every penny it rises above 290p, he loses £10. The bet can be closed and any profit or loss taken at any time.
Spread bets can be placed on any eventuality, some less serious than others. The handful of companies who control the market made books on the outcome of the London mayoral election, and before that on which candidates would finally go forward to the poll.
The Budget always provides some sport, both on the actual measures announced and on the length of the Chancellor's speech, the number of times he says "fiscal responsibility" and the number of sips from his water glass, for example.
But the bookies are keen for financial bets to be seen as a form of serious investment. Stuart Wheeler, chairman of IG, says: "One of the main attractions is that the profits are tax-free." If you want to bet on the FTSE 100 index and the Dow Jones industrial average, the market is open 24 hours a day, five days a week.
Plus, there is immediate execution of the bet at the price quoted. Bets can be placed by phone or on the Internet, and credit is available, subject to the usual checks.
He says that while the City provided most of his customers in the past, these now encompass "playboys, retired civil servants, hairdressers, taxi and lorry drivers and tea planters". As to whether it is investment or gambling, he prefers a middle term - "speculating".
Wheeler is something of the grand old man of financial spread betting, having founded the company in 1974. IG is floating on the stock market this summer, a debut that will provide more publicity for the practice generally. But Wheeler, 65, says that this is not a prelude to his retirement, and he will be keeping nearly all of his 44 per cent stake in the firm.
By contrast, the latest entrant is Cantor Index, owned by the City broker Cantor Fitzgerald, which has put a rumoured £5 million into the launch earlier this month.
David Buik, Cantor Index's marketing director, insists that spread betting's main advantages over simply playing the stock market are the ease with which a bet can be placed and the lack of charges.
"Because of the problems people have been having, it's very difficult now to day trade and make money. You don't know if you're getting the right price. You don't know if you can get on to the website."
Buik accepts that it would be "insanity" for any retail investor to abandon the cash market entirely. However, one advantage offered by spread betting is that you can hedge by placing a stop-loss, which means that if your losses reach a certain level, the bet is unwound and, while those losses then crystallise, they cannot get any larger.
This protects smaller investors against abrupt rises or plunges in the numbers, which could cost enormous amounts because the nature of spread betting means that their exposure is not limited to a fixed stake.
Simon Mansell, managing director of City Index, the second-biggest firm in the market, which on Monday extended its trading range to more than 250 US stocks, cautions against the use of a stop-loss in highly volatile markets. Mansell says that the price can drop below this, so triggering the loss, and then recover in the course of a single day.
Mansell believes that the "myth" that spread betting is hideously complex is eroding as it emerges from its City base. "The appeal is to anybody who is interested in investing on the stock market."
Today, anything up to 50,000 people have expressed such an interest by opening accounts at one or other of the bookies, with numbers said to be rising by 600 a month. Mansell says that he would not be surprised if this number grew by at least a half over the next year.
Cantor's Buik adds of his own expansion plans: "We would be devastated if we didn't have 15,000 accounts in a year's time. In two years' time we would want to be number one."
Actual numbers are hard to estimate, but Cantor will have to overtake IG's market share of more than 50 per cent. Meanwhile, City Index has about a third, and the rest is split between Financial Spreads and the smaller Spreadex.
Vince Stanzione owns a publishing company specialising in business information but reckons he made £150,000 on spread betting last year, mainly on indices such as America's Dow Jones and Nasdaq, on high-tech stocks and on the price of oil.
"The reason why I spread bet and don't use a proper futures or stock broker is tax - I would have paid more than £100,000 in capital gains tax.
"So far this year it's been choppy - I'm short on tech shares now. In these conditions, you've got to work a little bit harder. You can't just buy things, you've got to learn to go short," he says.
"The people who have been killed lately have been those who have only known things to go up. All last year, my money came from things going up - this year, it's been from things going down."
The shake-out in high-tech stocks has certainly left plenty of victims in its wake and may dampen down, if only temporarily, the growth of spread betting. It has certainly emphasised the risks attached, compared with normal equities trading.
Says one industry insider: "I know some people who have made £3 million or more in the course of the past year. But I also know people who in the past three months have lost a couple of million quid by being long on high-tech stocks."
SPREAD BETTING has not had a good press. In sport, it is inextricably linked to match-fixing, as with the Hanse Cronje affair. The less well-known financial spread betting is still seen by much of the population as a complex, dangerous and dubious practice best left to the Nick Leesons of the City.
But the explosion in investment on the stock market by ordinary punters, albeit muted by the implosion in high-tech stocks such as lastminute.com, is helping financial spread betting to a wider customer base. The serious investment magazines are taking an interest and a number of day traders on the stock market, who make their livings from shares, are adopting it in favour of screen-based dealing.
The main problem facing the five main firms that offer financial spread betting, gambling on movements of individual shares, stock market indices, interest rates and other financial instruments, is explaining in a few words just how it works.
Perhaps the best attempt comes from the market leader, IG Index, in the brochure it sends to potential customers. "We make a quote for the price of the share on a given date in the future," IG explains.
"You decide whether you think the share will be higher or lower by that time."
Punters who think the shares will be higher place an up bet, so "buying" the share at the quoted price. Conversely, if you think the price will fall, you make a down bet, so "selling" at the quoted price.
IG gives the example of the punter who thinks that Marks & Spencer shares will fall by December 14 - a good bet over the past two years. IG quotes a two-way price for a given date at 290p/295p. The punter "sells" M&S at £10 per point. This means that for every penny M&S has fallen below 290p at the given date, the expiry date, the punter makes £10. For every penny it rises above 290p, he loses £10. The bet can be closed and any profit or loss taken at any time.
Spread bets can be placed on any eventuality, some less serious than others. The handful of companies who control the market made books on the outcome of the London mayoral election, and before that on which candidates would finally go forward to the poll.
The Budget always provides some sport, both on the actual measures announced and on the length of the Chancellor's speech, the number of times he says "fiscal responsibility" and the number of sips from his water glass, for example.
But the bookies are keen for financial bets to be seen as a form of serious investment. Stuart Wheeler, chairman of IG, says: "One of the main attractions is that the profits are tax-free." If you want to bet on the FTSE 100 index and the Dow Jones industrial average, the market is open 24 hours a day, five days a week.
Plus, there is immediate execution of the bet at the price quoted. Bets can be placed by phone or on the Internet, and credit is available, subject to the usual checks.
He says that while the City provided most of his customers in the past, these now encompass "playboys, retired civil servants, hairdressers, taxi and lorry drivers and tea planters". As to whether it is investment or gambling, he prefers a middle term - "speculating".
Wheeler is something of the grand old man of financial spread betting, having founded the company in 1974. IG is floating on the stock market this summer, a debut that will provide more publicity for the practice generally. But Wheeler, 65, says that this is not a prelude to his retirement, and he will be keeping nearly all of his 44 per cent stake in the firm.
By contrast, the latest entrant is Cantor Index, owned by the City broker Cantor Fitzgerald, which has put a rumoured £5 million into the launch earlier this month.
David Buik, Cantor Index's marketing director, insists that spread betting's main advantages over simply playing the stock market are the ease with which a bet can be placed and the lack of charges.
"Because of the problems people have been having, it's very difficult now to day trade and make money. You don't know if you're getting the right price. You don't know if you can get on to the website."
Buik accepts that it would be "insanity" for any retail investor to abandon the cash market entirely. However, one advantage offered by spread betting is that you can hedge by placing a stop-loss, which means that if your losses reach a certain level, the bet is unwound and, while those losses then crystallise, they cannot get any larger.
This protects smaller investors against abrupt rises or plunges in the numbers, which could cost enormous amounts because the nature of spread betting means that their exposure is not limited to a fixed stake.
Simon Mansell, managing director of City Index, the second-biggest firm in the market, which on Monday extended its trading range to more than 250 US stocks, cautions against the use of a stop-loss in highly volatile markets. Mansell says that the price can drop below this, so triggering the loss, and then recover in the course of a single day.
Mansell believes that the "myth" that spread betting is hideously complex is eroding as it emerges from its City base. "The appeal is to anybody who is interested in investing on the stock market."
Today, anything up to 50,000 people have expressed such an interest by opening accounts at one or other of the bookies, with numbers said to be rising by 600 a month. Mansell says that he would not be surprised if this number grew by at least a half over the next year.
Cantor's Buik adds of his own expansion plans: "We would be devastated if we didn't have 15,000 accounts in a year's time. In two years' time we would want to be number one."
Actual numbers are hard to estimate, but Cantor will have to overtake IG's market share of more than 50 per cent. Meanwhile, City Index has about a third, and the rest is split between Financial Spreads and the smaller Spreadex.
Vince Stanzione owns a publishing company specialising in business information but reckons he made £150,000 on spread betting last year, mainly on indices such as America's Dow Jones and Nasdaq, on high-tech stocks and on the price of oil.
"The reason why I spread bet and don't use a proper futures or stock broker is tax - I would have paid more than £100,000 in capital gains tax.
"So far this year it's been choppy - I'm short on tech shares now. In these conditions, you've got to work a little bit harder. You can't just buy things, you've got to learn to go short," he says.
"The people who have been killed lately have been those who have only known things to go up. All last year, my money came from things going up - this year, it's been from things going down."
The shake-out in high-tech stocks has certainly left plenty of victims in its wake and may dampen down, if only temporarily, the growth of spread betting. It has certainly emphasised the risks attached, compared with normal equities trading.
Says one industry insider: "I know some people who have made £3 million or more in the course of the past year. But I also know people who in the past three months have lost a couple of million quid by being long on high-tech stocks."
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