Iron Condor

Spread betting is a risky business, and depending on who you believe, leaves most traders on the losing side. As a form of trading, it is a relatively new concept, having been introduced into the London markets for professional and city traders to hedge their trades. With the growth of on line investing and day trading, spread betting has now become a retail investor activity. Setting up an account is very simple, and trades can be as small as a penny a point.

As you will see we use betting jargon, as this aspect of trading has more to do with gambling than investing. It is called spread betting for a reason and not spread investing. It is a dangerous tool, since it uses leverage to allow you to control large blocks of shares with very little cash in your account. Most companies work on a highly geared, or leveraged account, which will allow you to work on a ratio of at least one to ten, if not more. This means in effect that with a small amount of capital in your account, you can control a large amount of real money in the market.

The concept of spread betting in principle is very simple. The company quotes a spread of two prices for a particular instrument. The instruments covered include shares, stocks, commodities, and even the major indices. Increasingly most companies now offer spread prices on on all major sports, political events and television shows, as well as all the major financial and currency markets. If you think the price is going up you buy at the higher price, and hope that the underlying instrument goes up, allowing you to sell at the lower price and make a profit. In short selling where you believe an instrument is falling in value, then the reverse is true. In this case you sell at the lower price, and buy at the higher price to close the trade, and hopefully make a profit.

Spread betting is also about trading a derivative. As the name implies, this is something that has been derived from another market. The primary market is called the cash market. This is where stocks and shares are traded daily and real money changes hands. In owning a share, you become a shareholder in the company, receive dividends and are able to vote. With a derivative, the spread price quoted is derived from the cash market price, so any movement in the price will always be dictated by a change in the cash market. You are not a shareholder, have no voting rights and do not receive any dividends. The company will then quote the spread based on this underlying price. All companies offer different spreads on different instruments, depending on the liquidity and volatility of particular markets.

There are therefore no dividends and the derivative has a contract life much the same as in the options market. These periods vary, but can be anywhere from a day to several months. Some contracts expire, but others are rolled over into following periods. Before you open a trade, be sure to understand the type and length of contract, and also the expiry and rollover dates.

All these companies offer starting stakes which are very small. You can trade with some of them for as little as 1p per point which effectively means you are trading one share. This is an excellent way to learn and you will not burn your fingers. I actually think this is better then paper trading, (pretend trading) as it is real money, even though it is only small amounts. As I have said before, when you start in a new market or a new trading tool, start small while you learn. Build up a track record and gradually increase your stakes. If you try to break the bank, it will break you first – you have been warned!