Financial spread betting for dummies explained, ForexSQ.com experts conducted what is financial spread betting for beginners and you will know about the risk of betting on spreads in financial markets and why most of people lost their money in online spread bet markets.
Financial spread betting for dummies
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The Financial Conduct Authority has studied a sample of spread-betting customers and found that 82% lost money on products offered by the industry called contracts for difference (CFDs). Is the regulator correct?
The FCA’s figure is broadly accurate, but it is not a new development. The ratio of losers to winners – about 80% of customers have always lost money – has long been financial spread betting’s dirty little secret.
That might not be a problem if their products were being sold as a form of leisure, in the same way that you may have an occasional flutter on the Grand National. But watching financial markets is nowhere near as much fun as watching sport and its complexity makes cricket’s Duckworth-Lewis method seem like a GCSE maths question.
So financial spread betting has to be marketed as an investment product. For the vast majority – the dentists and teachers dabbling with the equity and currency markets – it has never been anything close to that.
Why do most customers lose in financial Spread betting ?
There are a few reasons, but the main one is that predicting the future is really difficult, even for professionals. It is rare to get a City fund manager who consistently outperforms the market over the long run, so what chance has the dentist from Dumbarton or the teacher from Truro got?
Secondly, the way these bets are structured puts the gambler at a disadvantage. For example, while there are no fees on a trade, you buy and sell shares depending on a “spread” around the actual price.
A share trading at 100p may need to be bought at 101p, from which your winnings and losses are calculated. If the share goes up by 1p, you would win nothing. If it goes down by a penny, you would lose 2p a share – or two times your stake.
Thirdly, buying shares in the traditional manner may provide an investor with an income via a dividend, which would need to be factored into any profit calculation. There are no dividends with spread betting.
Why do so many financial spread-betting companies sponsor football and rugby clubs?
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It is not just sporting teams. The industry advertises heavily in all sorts of areas, especially the financial media, and runs educational courses to help improve its clients’ trading (which a cynic would say are really marketing events to tempt punters into betting for longer).
The reason for this effort stems from the ratio of losers to winners. If you are betting on a football match and lose, there is still a chance that you enjoyed the game (and the bet might have enhanced the entertainment).
The same has never been true of the financial markets, so if you are not winning, the betting soon becomes extremely tiresome. That means there are always a huge amount of spread-betting customers who quit, forcing companies to continually search for new customers.
But if people stop spread betting as soon as they realise they are losing money, is it really that dangerous?
That depends. You can lose a little over a long period of time, get bored of it and quit, and that should not be hugely damaging.
However, because spread betting can cause a customer to lose a lot more than their stake, they can end up with large debts if a market moves swiftly against them.
That is what happened in January 2015, when the Swiss national bank scrapped the €1.20 ceiling for the Swiss franc against the euro, which had been introduced in September 2011 to prevent the “Swissie” from surging in value. Amateur traders ended up with five-figure debts.
How can you lose more than you stake?
This is because spread betting is a leveraged product: you borrow money to make larger bets than you could otherwise afford.
Let’s take shares in a fictional airline called Speedy Jet, which trade at about 1 pound each. With conventional share buying, if you want to own 1,000 pound of the airline’s shares, you need to buy 1,000 of them and pay the money upfront to the financial spread betting broker.
On a spread bet, you would place a bet of 10 pound per point to give you the same exposure. So if Speedy Jet shares rise by a penny – equivalent to a point – you would win £10, just as on the share trade.
However, the difference with a spread bet is that you would only need a fraction of 1,000 pound to take this position. So, for example, opening a 10 pound per point spread bet on Speedy Jet may require an initial deposit of 50 pound (at a 5% deposit rate), rather than the 1,000 pound upfront if you had bought the shares.
That allows customers to make larger bets than they might, which can work both ways. If Speedy Jet shares go up by 20p, you have risked £50 to win £200 (20 points x £10). But the reverse is also true. If the shares lose 20p, you will have lost £200 – four times your stake.
The FCA regulatory said people were sometimes able to have leverage of 200 times, meaning they can take a £20,000 position with a £100 deposit.