The majority of investors use trading as a tool to subsidize their income, and many enjoy significant successes and a rapidly increasing bank balance. This is not to say that profits are guaranteed of course; speculation will always carry some degree of risk, and this is never truer than in the case of spread betting.
Beloved of gamblers and libertines alike, spread betting promises the potential for huge profits, alongside the danger of catastrophic losses. Allowing investors to transform their futures in an instant, many risk averse traders see it as no more than a glorified roll of the dice. They find the thought of playing Russian roulette with their savings abhorrent, and spread betting is given pride of place on their black list.
But all of this is changing. According to experts, a new trend is emerging, with canny investors maximizing their gains, whilst still managing to play it so safe that they could pay their mortgages on their spread betting profits.
Using Spread Betting to Lock in Gains
The financial markets have been undeniably volatile of late. The foreign exchange has fluctuated wildly as China verges on collapse, British, Swiss, and German banks bleed money, and oil and crude prices plummet. The stock markets have been no more stable, with the bottle falling off of European interests.
What the intelligent spread better has recognized is that what comes down comes just as rapidly go up, as the latest market volatility has demonstrated. In the world of investing, nothing is set in stone, and the beauty of spread betting is that it allows you to take advantage of the tempestuous nature of trading.
A common misconception, however, is that spread betting relies on luck alone. Traders are viewed as little more than gamblers, wildly throwing their money at every opportunity with the merest chance of providing a profit. This means that hundreds of thousands of investors are overlooking a valuable tool that they could be using.
Traditional long-only traders, however, are starting to recognize its utility, and are increasingly using spread betting like a standard stockbroking account. Used properly, and traded according to the traditional market indicators, they are realizing that it doesn’t have to be anymore high risk than other investment instruments, and that it can be cleverly use to lock in gains. Thus, should a takeover bid collapse, or European banks bleed more money, your painstakingly built profits won’t just evaporate overnight.
Going Long and Tactical Hedging
The primary reason that spread betting’s virtues are so often overlooked is because of one common misconception: that all spread betters go short. This is an erroneous assumption that the new breed of investor is turning on its head.
Instead of betting against assets, a large number of traders are choosing to go long on stocks over shorter periods instead. The beauty of this is that their profits are maximized, as neither stamp duty nor commission apply. When you combine this with the generous leverage offered by spread betting entities, you start to see hugely magnified gains every time that the stock markets move, which are not eaten into by the cost of buying shares beforehand.
However, spread betting’s true strength lies in its use as a tool for tactical hedging. If we look at Vodafone’s 2013 performance, we can see a prime example of how this worked. In 2013, Vodafone became the third largest company in London’s blue chip index. Its share values rose by 25 per cent following speculation of a potential takeover of its US joint venture, estimated to be worth £80 billion. This led to a wave of purchases by investors.
This is where savvy traders began to see opportunity in spread betting. By going short, they were able to hedge their bet, locking in the gains of rising share prices in the event that the Vodafone/Verizon transaction failed to come to fruition.
Reducing Market Risk
The irony of this is that spread betting, so often considered to be the black sheep of the investment market family, can actually be used to negate risk. As expert David Jones explains:
“If you had a £100,000 portfolio of FTSE shares, and were worried about a slide in the short term, you could sell the index at £15 per point, thus giving you a roughly £97,000 down bet on your investments. So, if the market slid, you would lose on your physical holding, but make on the spread bet, and vice versa.”
The majority of traders who choose to utilize this concept employ spread betting as a means of reducing general market risk.
According to Matt Basi, a leading figure at CMC: “Probably the most popular risk-reduction strategy we see employed by clients is that of taking long positions on a stock-specific basis, but short positions in the overall index.
“In so doing, they aim to remain market neutral in the hope that the companies on which they’ve taken bullish views go on to outperform the broader market over the medium term.”
This concept can even be applied to minimizing costs in your everyday life, and properly used it can be an exceptionally handy tool for reducing your outgoings. For example, something as simple as buying crude oil in the hope that it profits can be used to offset rising prices at petrol pumps.
Indeed, some experts are so enamored of the concept of spread betting as a risk aversion tool that they believe it could be used to make professional trading a feasible reality for many.
Although this may be slightly exaggerated, it is undoubtedly interesting to ponder whether risk could be reduced to such a degree that it need no longer be feared. Whilst we’ll be holding off on a career in spread betting for now, we still recommend that you give it a go and see how it profits your trading performance.