Capital Spread Betting
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Capital Spread Betting
Dan Blystone is the founder and editor of TradersLog.com, as well as the founder of the Chicago Traders Meetup Group.
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Spread betting allows traders to bet on the direction of a financial market without actually owning the underlying security. Spread betting is sometimes promoted as a tax-free, commission-free activity that allows investors to speculate in both bull and bear markets, but this remains banned in the U.S. Like stock trades, spread bet risks can be mitigated using stop loss and take profit orders.
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Spread betting is a derivative strategy, in which participants do not own the underlying asset they bet on, such as a stock or commodity. Rather, spread bettors simply speculate on whether the asset's price will rise or fall, using the prices offered to them by a broker.
As in stock market trading, two prices are quoted for spread bets—a price at which you can buy (bid price) and a price at which you can sell (ask price). The difference between the buy and sell price is referred to as the spread. The spread-betting broker profits from this spread, and this allows spread bets to be made without commissions, unlike most securities trades.
Investors align with the bid price if they believe the market will rise and go with the ask if they believe it will fall. Key characteristics of spread betting include the use of leverage, the ability to go both long and short, the wide variety of markets available, and tax benefits.
If spread betting sounds like something you might do in a sports bar, you're not far off. Charles K. McNeil, a mathematics teacher who became a securities analyst—and later a bookmaker—in Chicago during the 1940s has been widely credited with inventing the spread-betting concept. But its origins as an activity for professional financial-industry traders happened roughly 30 years later, on the other side of the Atlantic. A City of London investment banker, Stuart Wheeler, founded a firm named IG Index in 1974, offering spread betting on gold. At the time, the gold market was prohibitively difficult to participate in for many, and spread betting provided an easier way to speculate on it.
Despite its American roots, spread betting is illegal in the United States.
Let's use a practical example to illustrate the pros and cons of this derivative market and the mechanics of placing a bet. First, we'll take an example in the stock market, and then we'll look at an equivalent spread bet.
For our stock market trade, let's assume a purchase of 1,000 shares of Vodafone (LSE: VOD ) at £193.00. The price goes up to £195.00 and the position is closed, capturing a gross profit of £2,000 and having made £2 per share on 1,000 shares. Note here several important points. Without the use of margin, this transaction would have required a large capital outlay of £193k. Also, normally commissions would be charged to enter and exit the stock market trade. Finally, the profit may be subject to capital gains tax and stamp duty.
Now, let's look at a comparable spread bet. Making a spread bet on Vodafone, we'll assume with the bid-offer spread you can buy the bet at £193.00. In making this spread bet, the next step is to decide what amount to commit per "point," the variable that reflects the price move. The value of a point can vary.
In this case, we will assume that one point equals a one pence change, up or down, in the Vodaphone share price. We'll now assume a buy or "up bet" is taken on Vodaphone at a value of £10 per point. The share price of Vodaphone rises from £193.00 to £195.00, as in the stock market example. In this case, the bet captured 200 points, meaning a profit of 200 x £10, or £2,000.
While the gross profit of £2,000 is the same in the two examples, the spread bet differs in that there are usually no commissions incurred to open or close the bet and no stamp duty or capital gains tax due. In the U.K. and some other European countries, the profit from spread betting is free from tax.
However, while spread bettors do not pay commissions, they may suffer from the bid-offer spread, which may be substantially wider than the spread in other markets. Keep in mind also that the bettor has to overcome the spread just to break even on a trade. Generally, the more popular the security traded, the tighter the spread, lowering the entry cost .
In addition to the absence of commissions and taxes, the other major benefit of spread betting is that the required capital outlay is dramatically lower. In the stock market trade, a deposit of as much as £193,000 may have been required to enter the trade. In spread betting, the required deposit amount varies, but for the purpose of this example, we will assume a required 5% deposit. This would have meant that a much smaller £9,650 deposit was required to take on the same amount of market exposure as in the stock market trade.
The use of leverage works both ways, of course, and herein lies the danger of spread betting. As the market moves in your favor, higher returns will be realized; on the other hand, as the market moves against you, you will incur greater losses. While you can quickly make a large amount of money on a relatively small deposit, you can lose it just as fast.
If the price of Vodaphone fell in the above example, the bettor may eventually have been asked to increase the deposit or even have had the position closed out automatically. In such a situation, stock market traders have the advantage of being able to wait out a down move in the market, if they still believe the price is eventually heading higher.
Despite the risk that comes with the use of high leverage, spread betting offers effective tools to limit losses .
Risk can also be mitigated by the use of arbitrage, betting two ways simultaneously.
Arbitrage opportunities arise when the prices of identical financial instruments vary in different markets or among different companies. As a result, the financial instrument can be bought low and sold high simultaneously. An arbitrage transaction takes advantage of these market inefficiencies to gain risk-free returns.
Due to widespread access to information and increased communication, opportunities for arbitrage in spread betting and other financial instruments have been limited. However, spread betting arbitrage can still occur when two companies take separate stances on the market while setting their own spreads.
At the expense of the market maker, an arbitrageur bets on spreads from two different companies. When the top end of a spread offered by one company is below the bottom end of another’s spread, the arbitrageur profits from the gap between the two. Simply put, the trader buys low from one company and sells high in another. Whether the market increases or decreases does not dictate the amount of return.
Many different types of arbitrage exist, allowing for the exploitation of differences in interest rates, currencies, bonds, and stocks, among other securities. While arbitrage is typically associated with risk-less profit, there are in fact risks associated with the practice, including execution , counterparty, and liquidity risks. Failure to complete transactions smoothly can lead to significant losses for the arbitrageur. Likewise, counterparty and liquidity risks can come from the markets or a company’s failure to fulfill a transaction.
Continually developing in sophistication with the advent of electronic markets, spread betting has successfully lowered the barriers to entry and created a vast and varied alternative marketplace.
Arbitrage, in particular, lets investors exploit the difference in prices between two markets, specifically when two companies offer different spreads on identical assets.
The temptation and perils of being overleveraged continue to be a major pitfall in spread betting. However, the low capital outlay necessary, risk management tools available, and tax benefits make spread betting a compelling opportunity for speculators.
Capital Spreads is a financial spread betting company that provides tight spreads on the market and an easy-to-use platform. It’s a division of the London Capital Group, and comes under the FSA for regulation. The company was founded in 1996 as a proprietary trading business and has since grown to now offer financial derivative products, foreign trading and a derivatives broking service to both retail and professional clients. Today, Capital Spreads is one of the larger spread betting brokers, reporting an active client base of over 50,000.
Capital Spreads offers a demo account, which unfortunately does not have all the facilities of an active account as the charting is limited. However, the company does accommodate novice traders by offering seminars and online training in spread betting which includes a eight chapter paper handbook that is given to new traders who have funded their account with at least £100. The manual explains trading in detail and there are also sections covering both technical and fundamental analysis giving clients a good overview of these two investment techniques.
Capital Spreads enforce a mandatory automatic stop loss order generator which ensures that every time you trade you have an exit order in place. The automatic stop loss level can of course be adjusted to any level you want so long that you have sufficient funds in your account to support this.
Tradable markets: Wide range of products from the UK and international financial markets. These include major indices, currencies, equities, commodities and treasuries.
Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.
Seminars on spread betting available: Introduction to spread betting and technical analysis seminars offered regularly in London.
Minimum stake & deposit: Min stake is £1. Min deposit varies depending on the market you trade but should be above £100.
Credit spread betting accounts available?: Spread betting credit accounts not currently available.
Demo account available?: £10,000 spread betting demo account available.
Pros – Tight fixed spreads and competitive margins coupled with an intuitive and simple trading platform. Good trade executions.
Cons – Won’t quote some of the smaller companies. Some reported cases of slippage (although to be fair a degree of slippage is unavoidable when trading) and occasional pricing errors.
Best For – Private traders looking to swing trade blue chip stocks or other liquid markets.
We give Capital Spreads a Rating of: 4.5 for range of markets, margins, spread sizes and general client satisfaction (ratings are from 1 to 5 with 5 being highest).
Unlike some other spread betting brokers, Capital Spreads claims to offer fixed spreads most of the times – in fact they state that their headline spreads are tighter for longer than their competition. Not spreads ‘as low as’ or ‘from’ but spreads fixed at competitive rates throughout the trading day. This is better than variable or ‘typical’ spreads that tend to widen during volatile market conditions meaning that you might not get the spread you want when you actually want to trade. One of the most popular currency pairs, the EUR/USD, is quoted with a one-point spread throughout the 24-hour trading day.
With a Capital Spreads trading account you can access a wide range of financial markets such as UK, European and USA as well as other global shares, foreign exchange, indices, commodities and bonds. The company aims to offer great value for money by offering typical spreads significantly better than those offered by its competitors.
Take a look at some of Capital Spreads tight fixed spreads*, available to all clients:
* Capital Spreads’ spreads are fixed during trading hours and non-force majeure events.
The trading platform which Capital Spreads offers was improved and updated in 2010. The improvements listed include split screens, with the ability to re-organize the display to suit your requirements, and stop and limit orders on trade tickets. Stops are always on there and it is easy to use. The platform accommodates both contracts for difference and spread betting. The trading platform is browser-based and you do not need to download any software onto your computer. Capital Spreads have also recently launched a new charting package allowing spread trading the ability to apply technical analysis indicators set trading alerts, backtest their trading systems and a whole lot more and this is available to clients free of charge. The backtesting facility is actually quite simple to use and allows to see how your strategy would have fared in the past. You input your strategy based on the technical indicators you select and then use it to see how you would have performed. In order to check their new charting package we’d suggest you open a free demo account with £10,000 play money
It’s particularly interesting to note that the Capital Spreads web site offers a tab of trading tools, and these include many useful features like Guaranteed Stops, Limited Risk accounts, News Streams and Trailing Stops across all financial markets. From your live account you can access these portals from the “Trading Tools” button located in the top right-hand corner of the screen. By clicking on this a new window will appear and you will be able to access the following:
This includes an economic calendar with detailed informations about all data major economic releases such as unemployment and inflation data as well as reports on growth, including the previous, forecast and actual figures. There is also a plethora of extra information including analysis tools such as a stock screener, heat maps and a news centre .
This is a live market commentary provided by RAN Squawk which gives you the opportunity to listen to important market developments as they happen. As well as real-time audio news & commentary for the financial markets there is other material such as real-time scrolling news, calendar, research reports and videos .
The live feed can act as your eyes and ears on the markets. Listeners range from the biggest hedge fund managers in the world to top tier investment banks, fund managers, brokers and individual traders .
Of course, there are videos of the daily or weekly events with commentary, and a calendar of economic data for those who wish to trade the news. But they also supply planning tools, such as an outline for a trading plan that you can fill in, and which reminds you of the important questions to address; and a template for Microsoft Excel users to use as a trading diary. The trading platform which is web-based includes a variety of streaming tools, such as quotes and charts, and links to research available from Trading Central. Further educational tools include a Live Squawk to help traders stay in touch with market news headlines during the trading day, trading signals and ‘Heatmaps’ that provide at-a-glance guides to the market hotspots.
When you open an account, you will find there is a choice of currency that you can use – sterling, US dollars, or euros. Capital Spreads does not require a deposit for you to open a trading account, although you must deposit funds before attempting any trading. In this case, the minimum deposit depends on the product you are trading. What this means is that you do not have to deposit funds in order to play with their software. As mentioned, the demo account does not give full functionality of the charting, so this is a way to further test whether you wish to start trading with Capital Spreads.
“CapitalSpreads’ clients can access a trading platform that offers low margins and tight spreads with free unlimited conditional orders, access to all main UK stocks, live pricing, market news and analysis, and free charting which will ensure clients are more equipped than ever to make smart, strategic stock market trading decisions.”
When it comes to user reviews of Capital Spreads, it appears that most people find that they give great customer service, as well as competitive spreads on their products, which number more than 2500. The charting is reported as satisfactory, which obviates the need to buy any third-party software, and the low deposit amounts were appreciated by the clients.
Anything for newbies?: If you open a live account with Capital Spreads and fund it with at least GBP100 you are eligible to receive a copy of the ‘Capital Training Programme’ which explains the mechanics of spread betting and risk management in detail. In addition to the Capital Spreads demo account and the eBook , newcomers may also wish to download the Trading Plan and Trading Diary tools available in the Trading Tools section of the website. Guaranteed stops are also available to help clients protect themselves against any possible slippage or market gaps.
Lastly if you are new to spread betting you may want to attend on the of free monthly ‘Learn to spread bet’ seminars presented by one of the company’s senior dealers who will explain the subject and how this form of trading works as well as the risks involved. For more advanced traders Capital Spreads also offer another seminar ‘How to build a spread betting strategy’ hosted by Certified Financial Technician, Malcolm Prior, who will take participants through the main steps in building a trading strategy. Another seminar class ‘Upcoming trading opportunities’ seminar hosted by Market Economist, Bill Hubard, takes viewers through the main happenings in the market today.
Mobile Trading: Yes. Mobile trading (via Android, iPhone and Tablet) is supported. Capital Spreads in particular offers an iPhone application which lets you check prices, open and close spread betting trades, create and amend orders and check charts. The charts update automatically and can even bet set for different time intervals ranging from anythi
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