Spread Betting Problems
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Spread Betting Problems
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Remember : With spread betting there are real charges: They exist in the spread
Spread betting agencies tend to promote their service on the basis that one of the advantages of using this method of investing is in the fact that they do not have transaction charges or fees. This is simply not true - the transaction charge is firmly embedded in the spread. These apparently superflous costs can have a dramatic effect on profitability over-time particularly if the trader tends to do a lot of short-term trades. If you are serious about spread betting then you have some homework to do, and the very first place you must start is in an analysis of spreads offered by different spread betting agencies.
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It is not likely that a scam could last for more than 35 years, involve such a large number of people, and be regulated by FSA. Nevertheless, some people make negative comments about spread betting, raising doubts on the behaviour of some spread betting companies.
Financial spread betting started in 1974 with the creation of the “Investor’s Gold Index” and it is estimated that there are more than 1 million spread betters in the UK. The activity is subject to the Financial Services Authority (FSA) strict regulations as any other type of trading in the UK. Some providers are also exposed to further scrutiny because they are public traded companies, as is the case of IG Index and Capital Spreads.
Let’s take a closer look into the arguments often raised by scam theorists and try to understand and disentangle them.
The argument: “When you buy and sell, you’re not really dealing with the market but rather with a counterparty – the spread betting firm. The product you’re trading is just an over-the-counter contract made between you and the provider. You will receive take-it-or-leave-it price offers from the firm, resulting in higher spreads and lower liquidity.”
It’s true that you’re not trading the market directly and that you pay higher spreads. But zero commissions means more transparent prices and for most trades the spread is lower than commission fees faced elsewhere. It’s true that you may find yourself in the uncomfortable position of depending on your provider when you want to close a position but taking into account the huge competition that comes not only from the UK nowadays, it wouldn’t make sense for any reputable firm to risk annoying its clients for the sake of a few spread points.
The argument: “Any profit you make means a loss for the firm, incentivising them to make it as difficult as possible for you to make a profit by skewing spreads or even suspending momentarily the market when you want to close a position.”
The idea that your profit is your provider’s loss is not correct. Most providers cover their books in the market (at least partially). So the money they lose to winning clients is won back through their hedging trades in the stock markets.
It is very hard and costly to find new clients, and clients are not interested in losing money recurrently. Earning money directly from client losses would not be a smart route to follow. Spread betting providers benefit more from getting low and consistent commissions from happy clients than from clients who lose their initial deposit very quickly.
The argument: “Spread Betting is a form of gambling, and cannot be considered as investing. Bets on a spread are just like bets in a casino!”
The name financial spread betting is not a fortunate one. The word “betting” is automatically connected with gambling. Although gambling is a legitimate recreational activity, we know that gamblers generally lose in the long run. Also, spread betting is often associated with sports spread betting which in turn associates it with gambling again.
In spread betting you bet on price movements like you do on any derivative contract like share options, for example. “Betting” is an inappropriate and unfortunate name. Spread betting is regulated by the FSA and not by the Gambling Commission. Unlike gambling, research can give you a profitable edge.
The argument: “It is said that only 1 in 5 spread betters end up a winner. The odds are greatly in favour of the spread betting provider.”
While it is true that only about 20% of spread betters are long term winners, studies have shown that a similar percentage of traders in more conventional financial markets lose money. So this is not something that applies just to spread betting.
So why do most traders lose money? What most novice traders need to understand is that you can’t expect to master trading when you start out – just like you can’t expect to master dentistry or sports or anything else in a week. You must take the time to learn the intricacies of the markets you trade in, and do some fundamental research and technical analysis. It’s a time-consuming activity. A large number of people open accounts with low starting account balances, gearing their positions to unthinkable levels with very high likelihood of resulting in bank ruin. Many of these beginners are naive and don’t really know how financial markets work. They often assume positions based on nothing more than gut feeling. As the expression goes – “if you fail to prepare then you should prepare to fail”.
The argument: “Some internet posters report difficulties in selling positions, suspect price spikes, stop order slippage, price re-quotes, and many more problems.”
Some may be true, but remember one important thing. One unsatisfied client can make a lot of noise, whereas satisfied clients usually tend to keep quiet. Comments you may find may be skewed and exaggerated. While it is difficult to comment on individual cases without knowing the full details, it should be known that it is in the interests of the spread betting firms to treat their clients fairly and to make sure that they stay with them over the long run.
The argument: “There are many trading systems based on technical analysis selling for huge prices and claiming huge profits but they don’t work.”
Trading systems are not sold or provided by spread betting companies but rather by external sources. Those systems don’t work and you will end spending your money and time. If the systems were really good, why would they sell it instead of profiting themselves from such a great strategy? Most trading systems are scams, looking for people who are desperate for profits. You will have to read books and maybe attend some seminars to build your own system. Any shortcut will lead you nowhere.
As a final comment, I must say that financial spread betting is an excellent way to trade the markets but one that needs a high degree of knowledge and dedication. Most people take shortcuts and end up losing money - contributing to a high percentage of losers. This results in disgruntled people making negative comments about financial spread betting and scaring newcomers. The problem is very often with the traders themselves and not because of an underlying problem with spread betting.
It is not likely that a scam could last for more than 35 years, involve such a large number of people, and be regulated by FSA. Nevertheless, some people make negative comments about spread betting, raising doubts on the behaviour of some spread betting companies.
Financial spread betting started in 1974 with the creation of the “Investor’s Gold Index” and it is estimated that there are more than 1 million spread betters in the UK. The activity is subject to the Financial Services Authority (FSA) strict regulations as any other type of trading in the UK. Some providers are also exposed to further scrutiny because they are public traded companies, as is the case of IG Index and Capital Spreads.
Let’s take a closer look into the arguments often raised by scam theorists and try to understand and disentangle them.
The argument: “When you buy and sell, you’re not really dealing with the market but rather with a counterparty – the spread betting firm. The product you’re trading is just an over-the-counter contract made between you and the provider. You will receive take-it-or-leave-it price offers from the firm, resulting in higher spreads and lower liquidity.”
It’s true that you’re not trading the market directly and that you pay higher spreads. But zero commissions means more transparent prices and for most trades the spread is lower than commission fees faced elsewhere. It’s true that you may find yourself in the uncomfortable position of depending on your provider when you want to close a position but taking into account the huge competition that comes not only from the UK nowadays, it wouldn’t make sense for any reputable firm to risk annoying its clients for the sake of a few spread points.
The argument: “Any profit you make means a loss for the firm, incentivising them to make it as difficult as possible for you to make a profit by skewing spreads or even suspending momentarily the market when you want to close a position.”
The idea that your profit is your provider’s loss is not correct. Most providers cover their books in the market (at least partially). So the money they lose to winning clients is won back through their hedging trades in the stock markets.
It is very hard and costly to find new clients, and clients are not interested in losing money recurrently. Earning money directly from client losses would not be a smart route to follow. Spread betting providers benefit more from getting low and consistent commissions from happy clients than from clients who lose their initial deposit very quickly.
The argument: “Spread Betting is a form of gambling, and cannot be considered as investing. Bets on a spread are just like bets in a casino!”
The name financial spread betting is not a fortunate one. The word “betting” is automatically connected with gambling. Although gambling is a legitimate recreational activity, we know that gamblers generally lose in the long run. Also, spread betting is often associated with sports spread betting which in turn associates it with gambling again.
In spread betting you bet on price movements like you do on any derivative contract like share options, for example. “Betting” is an inappropriate and unfortunate name. Spread betting is regulated by the FSA and not by the Gambling Commission. Unlike gambling, research can give you a profitable edge.
The argument: “It is said that only 1 in 5 spread betters end up a winner. The odds are greatly in favour of the spread betting provider.”
While it is true that only about 20% of spread betters are long term winners, studies have shown that a similar percentage of traders in more conventional financial markets lose money. So this is not something that applies just to spread betting.
So why do most traders lose money? What most novice traders need to understand is that you can’t expect to master trading when you start out – just like you can’t expect to master dentistry or sports or anything else in a week. You must take the time to learn the intricacies of the markets you trade in, and do some fundamental research and technical analysis. It’s a time-consuming activity. A large number of people open accounts with low starting account balances, gearing their positions to unthinkable levels with very high likelihood of resulting in bank ruin. Many of these beginners are naive and don’t really know how financial markets work. They often assume positions based on nothing more than gut feeling. As the expression goes – “if you fail to prepare then you should prepare to fail”.
The argument: “Some internet posters report difficulties in selling positions, suspect price spikes, stop order slippage, price re-quotes, and many more problems.”
Some may be true, but remember one important thing. One unsatisfied client can make a lot of noise, whereas satisfied clients usually tend to keep quiet. Comments you may find may be skewed and exaggerated. While it is difficult to comment on individual cases without knowing the full details, it should be known that it is in the interests of the spread betting firms to treat their clients fairly and to make sure that they stay with them over the long run.
The argument: “There are many trading systems based on technical analysis selling for huge prices and claiming huge profits but they don’t work.”
Trading systems are not sold or provided by spread betting companies but rather by external sources. Those systems don’t work and you will end spending your money and time. If the systems were really good, why would they sell it instead of profiting themselves from such a great strategy? Most trading systems are scams, looking for people who are desperate for profits. You will have to read books and maybe attend some seminars to build your own system. Any shortcut will lead you nowhere.
As a final comment, I must say that financial spread betting is an excellent way to trade the markets but one that needs a high degree of knowledge and dedication. Most people take shortcuts and end up losing money - contributing to a high percentage of losers. This results in disgruntled people making negative comments about financial spread betting and scaring newcomers. The problem is very often with the traders themselves and not because of an underlying problem with spread betting.
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Spread betting on sports is much less common than traditional
sports betting, for a variety of reasons. It’s not as widely
available for one thing, because only a small percentage of sports
betting sites offer spread betting. Many people also believe it’s a very complex form of betting, which
makes them not want to get
involved.
There are a lot of people that do enjoy spread betting
though, particularly in the United Kingdom and some parts of
Europe. We wouldn’t say it’s easy to understand, but it’s really
not as complicated as people think. It can be very profitable
too, if you know what you’re doing, and it’s a very exciting way
to bet.
If you’re interested in trying spread betting, then please
take a moment to read through this article. We’ve explained the
basics of how it works and provided some examples to illustrate
how wins and losses are calculated. We’ve also discussed:
This form of betting should not be confused with point spread betting. You can read
more about point spread betting on the following page.
Spread betting is basically betting on whether something will
happen before or after a set time, or whether the amount of
something will be higher or lower than a set number. In this
respect it’s similar to totals betting or over/under betting.
The way it works is that a bookmaker will set a spread for a
market, such as the number of goals scored in a soccer match,
and you bet based on that spread. You place a buy bet if you
think the number of goals will be higher than the spread, and
you place a sell bet if you think the number of goals will be
lower than the spread.
You’ll note from the above that the spread is a range and not
a single number. In this case, the range is 2-3 goals. When
buying, your bet is based on the higher end of the spread. When
selling, your bet is based on the lower end of the spread.
Therefore you need more than three goals to win if buying, and
less than two goals to win when selling.
The fundamental difference between spread betting and totals
betting is that there are no odds involved. Your wins or losses
are based on how right you are, or how wrong you are. If you are
right, then you receive a return of your initial stake
multiplied by the difference between the spread and the actual
outcome. If you’re wrong, you have to pay your initial stake
multiplied by that difference.
This sounds a lot more complicated than it really is in
practice. We’ll now use some examples to show how spread betting
works in practice, which should make things easier to
understand.
First, let’s look at what would happen based on buying or
selling the number of goals scored in a soccer match. We’ll use
the spread mentioned earlier, of 2-3 goals, and work on an
initial stake of $10.
As you can see, it’s relatively easy to calculate your wins
and losses. They will always be in multiples of $10, as that was
your initial stake.
You may have noticed that the potential winnings, or losses,
aren’t particularly big relative to the initial stake. This is
because the number of goals scored in a soccer match is rarely
much different to the spread. There are other markets where
there’s the potential to win, or lose, much more.
Another popular spread betting market is on the time of the
first goal in a soccer match. The bookmaker sets a spread on the
time, and you have to decide whether you think the first goal
will come earlier or later than that spread. You buy if you
think it’s going to be later, and sell if you think it’s going
to be earlier.
Let’s look at some possible results if you were buying or
selling minutes on a spread of 26-28. We’ll again work on an
initial stake of $10. Wins and losses are calculated in exactly
the same way but, as you can see, the amounts can be a lot
higher.
Hopefully these examples have highlighted that spread betting
is really n
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