DIY Investor Magazine
/
March 2016
41
If the price of the share or index goes in the
opposite direction to your prediction, your loss
represents the number of pips it has moved
against you multiplied by the size of your stake;
you should be fully aware of the magnitude of any
potential losses before you begin spread betting.
Bets can be closed at any time to crystallise
a profit or limit a loss; markets can move very
quickly, delivering the potential for quick wins,
or losses, and with no limit to the number of
pips an investment may rise, potential profits are
uncapped. If you correctly predict the direction of
a price movement your returns can be magnified
but if you get it wrong your losses will be greater
too which means that financial spreads can be a
very volatile investment.
Spread betting platforms offer tools such as ‘stop
loss’ orders to allow you to protect against the risk
of a big loss where your bet is automatically closed
if the index moves a specified amount against you.
MARGIN TRADING
Spread betting accounts allow you to place a bet
and pay a deposit rather than the full bet amount,
which means that you are able to stake a larger
position on each point in the bet than you would
have been able to otherwise; this is also known as
gearing.
If the bet goes against you the company will need
to be assured that you can cover the full cost of
the bet so you may either have to lodge money
on account, or have a line of credit agreed with
the broker. Despite the fact that financial spread
betting is based upon instruments that are traded
on exchange, it is classed as gambling so it is
exempt from capital gains tax and stamp duty.
RISKS
Spread betting can deliver potentially unlimited
profits in double quick time, but it is also highly
risky; the DIY investor should only consider it if any
losses would not do irreparable damage to their
wealth and they have the ability to access to the
finance should they incur any losses.
In the same way as potential profits, losses are
also unlimited and spread betting without placing
limit orders could be considered foolhardy.
It is important to fully understand the potential
pitfalls before taking any position and make sure
that the tools offered by your chosen provider give
you the security you want; most providers will allow
you to trade on dummy accounts to familiarise
yourself with their platform and the concept before
you start to stake your hard-earned.
Financial spread betting should only be
undertaken with money you can ‘afford’ or
are prepared to lose and should therefore be
conducted outside of a long term investment
strategy; if you decide to take a gamble, research
your bet well and set limits against big potential
losses.
More information about ISA options and allowances can be found at
