Spread-betting is risky business
September 18, 2007
Spread betting is a risky game and should be left to professionals who work in the City with cash at their disposal, according to a leading bet broker.
Betbrokers, which is described as the world’s first independent bet broker and clearing house, has warned of the huge financial risk that comes with spread betting on the stock markets.
EU regulations will attempt to tighten up the guidelines surrounding spread betting, the European Markets in Financial Instruments Directive (Mifid) has introduced "more extensive requirements" for those wishing to open an account.
However, Betbrokers chairman Wayne Lochner said they will make little difference, as the firms that offer spread betting are careful as it is.
"I know that the spread betting companies do always err on the side of caution, because the whole premise of a spread bet suggests that there is an element of credit that must be available."
Spread betting is also available on football matches, currencies, commodities and even a politician’s approval rating.
Written by Peter Kenny · Filed Under News Banking
Yes, no doubt spread betting is riskier than traditional dealing with a stock broker and in theory a spread bet on the down side has infinite loss potential if the market moves up (whereas an upside bet has a defined, probably large, loss if the instrument runs to 0). But that’s true of many investments…consider what will happen to many people if house prices drop 25% and they put in a 10% deposit.
Spread betting firms offer (or insist on) the right to place a stop loss on any bet to the deposit placed. For example I placed a positive bet on HSBC December 2007 3 weeks ago at 870p. My purshase price was 878p, the 8p difference being the cost of the stop loss insurance. If the shares dropped below 855 (just below the 52 week low) then the deal would be cancelled. The shares rose to 815p yesterday, so I closed out for a nice 430 pounds profit…not taxable either.
So yes…investing in any instrument is risky…but so is sticking your money under a mattress. Do the homework…stay diversified.
Liam