Retail Banking

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Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Spread betting: play your chances against the financial markets

Over the years, there has been an increase in the number of companies providing spread betting trading applications and the number of accounts opened surge year on year, with the number of bets placed by account holders also on the rise. Spread betting applications are accessible via your mobile phone, tablet or PC and are extremely easy to use, allowing an individual to place bets at their convenience, 24 hours a day throughout the year.

Spread betting applications allow people to place bets against the movement of financial markets, indices, equities, FX, commodities, etc. As an example, the share price of a given stock could be 200p and I anticipate it to increase. With a click of a button I place a bet using the application, displaying the real time price, so that I can track any movements. The more the share price moves in my favour, the greater the profit I will make; and likewise, if the price moves against me, the greater the loss. Once I'm content with the profit or cannot absorb any further loss , I can simply end the bet at the click of a button, effectively 'cashing out'. 

As such, spread betting acts as a compelling alternative to investing directly in the markets. There are a range of benefits which include:

1.     Leverage – you only need a deposit of a small percentage of the total bet value. If I had £1000, I could go to a stockbroker and buy some shares of £1000 value or I could use the £1000 as a deposit and bet on the market as if I had £10,000 (£50 per point bet on a share priced at 200p with a deposit requirement of 10%).

2.     Tax – spread betting is termed as gambling, and as a such, there are no tax implications on winnings i.e. no capital gains tax.

3.     Costs – some may find that costs associated with transacting in spread betting are considerably lower as you are charged a spread instead of a fixed transaction fee

Considering some of the benefits stated above, some people may prefer to stay away from such applications and one of the biggest reasons for this is the underlying risk. Spread betting is by far more risky than actually buying shares; especially if you are leveraging. There is no underlying store of value, as there is with a stock and you could see all your money vanish within seconds.

A bet with an initial deposit of £1000 gives me £50 a point exposure on a share priced at 200p, the price only needs to move against me 20 points for me to lose the whole £1000 (£1000/£50 a point). If I had bought £1000 worth of shares, the chances of me losing the whole of the £1000 are considerably lower compared to spread betting, as the price will have to fall 200 points to 0p.

To address this, spread betting companies have introduced features within their applications in order to provide users with controls. One such feature is a ‘Stop Loss’, which enables users to enter the maximum loss they are willing to absorb. Once the ‘Stop Loss’ price has been reached, the bet is closed. However, in volatile market conditions such a risk migrating feature can be detrimental. For example, the markets may open and close in my favour but at some point during the day my ‘Stop Loss’ was breached and my position closed. If not for the feature I could have made a profit as opposed to a loss.

These products and services provide everyone with the opportunity to get involved in some way with the financial markets. It is important to consider individual risk appetite; there is great exposure risk and any capital invested should be capital which can be forgone without a significant impact.

In addition, placing educated bets as opposed to going in blind is important and an individual who may use technical and fundamental analysis will have a better insight to which way the markets are heading. Finally, if you have the risk appetite and apply your knowledge to every bet then have a predetermined exit point at which you will close the bet. It can be tempting to carry on the bet especially if you’re making money but don’t get greedy - trade using the application do not gamble! 

 

About the author

Ali Munawar
Ali Munawar
Ali Munawar is a Consultant in the Business Model Transformation team at CapGemini Consulting. Ali has consulting experience across the banking and financial services sector with particular focus on large scale organisational change. Prior to joining CapGemini, Ali worked for Barclays, HSBC and Lloyds Banking Group. Outside of work Ali is interested in Cricket. He also takes part in a number of charitable activities,organising and leading projects to raise money for charity organisations.

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