Room for the Steady Eddies, too

You don't have to be a chancer more traditional investors can also reap benefits from spread betting, says Russell Lynch
13 July 2016

In the minds of some, the world of spread betting conjures up an image of the adrenaline-fuelled junkie: the white-knuckle punter knocking back caffeine as he gambles on the merest twitch of the diciest red-or-black casino-chip oil explorer.

Of course, there are spread-betters who live up to the stereotype. But for every chancer ready to back up their judgment with huge bets on trash companies on a whim, there's a far greater number of more cautious punters, traditional long-only investors who are increasingly using spread betting like a normal stockbroking account.

Used cannily as a precision tool, it can be employed to lock in gains and ensure that juicy profits piled up over months don't vanish overnight when a takeover bid collapses or the Bank of England suddenly drops a bolt from the blue on interest rates. Really the question for any semi-serious retail investor with a few quid invested in shares is: can you afford not to have a spread betting account? There's virtue in being a Steady Eddie; it's a myth that spread betters are going short — that is betting against — everything. According to IG, many investors are now using accounts to go long on particular stocks over shorter periods.

The advantage of using spread betting in this way is that investors don't have to pay stamp duty or commission on the trade. These costs mount up when you're paying 0.5% of the value of a normal share purchase straight into the Treasury's coffers every time you buy, and that's before commission to the dealer, which is usually at least £10.

Although they are spread betting rather than share buying, investors still get exposure to dividends but are also able to employ the spread betting punter's chief advantage: leverage. This can hugely magnify gains. For example, for a £10-a-point bet on a company, the maths is simple: for every penny a share moves, you earn £10, so if shares in Tesco jump £1, you're immediately a grand to the good, without the attendant cost of buying the shares.

Most traditional investor buyers are interested in harvesting dividendsbut how does that work with spread betting? Again, it's fairly straightforward. If you have a spread bet open on ex-dividend day and you're long, you get money credited to your account because the shares fall. Conversely, if you're short, you have to pay a fee when the shares drop: the largesse of spread betting firms doesn't extend to handing out free money to punters.

How else can investors use spread betting? It's as much about de-risking your portfolio as taking huge punts and in these uncertain times, that has a definite appeal. For example, if you wanted to avoid selling shares towards the end of the tax year to avoid a bill, you could sell them on a spread to lock in a price. You could then go on to sell the stock in April and minimise your tax bill.

The same hedging principle applies to currencies. If, for example, you were thinking about splashing out on a holiday home in Spain later this year and you were worried that the sterling/euro exchange rate was going to move against you, selling the pound against the euro helps you lock in an exchange rate because if it does drop, your profits from the hedge offset the loss on the currency.

In short, it's time to forget the stereotype of the seat-of-the-pants punter making and losing millions by lunchtime.

In a world where returns are meagre and inflation is high, spread betting and its advantages are something the Steady Eddies of the investing world can't afford to ignore.

For more information on CMC Markets: http://www.cmcmarkets.co.uk/en

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in

MORE ABOUT