Despite the increased awareness, there are still plenty of misconceptions about how spread betting and CFDs work and the sort of people they are for - I would like to try and address this and offer some suggestions.
When many of us think about trading we may well have an image of an adrenaline-fuelled individual sitting in front of eight screens, eyes darting from the euro, to the FTSE to the price of pork bellies - while nimble fingers flit over the mouse and keyboard, smashing in trades at an impressive rate of knots.
Whilst of course you can trade that way - and your broker will definitely be grateful for the spreads/commissions that lots of activity generates – it doesn’t necessarily have to be quite so intensive. The vast majority of those using spread betting in the UK – and using CFDs everywhere else around the world – have normal jobs to get on with during the day and therefore don’t have the luxury (or maybe tedium…) of staring at a screen full of changing prices for 12 hours a day.
Trading does not have to be all about day trading – jumping in and out of markets all day long and having no overnight positions. There are some who take a more relaxed view of the markets using spread betting/CFDs – and will run positions for days, weeks and even months.
If we look at individual equities, there have been some great trends this year as markets climbed higher for the first four and a half months at least – but regardless of what the broader market is doing, there are usually some equities somewhere showing a great trend in one direction or another. One that sticks in my mind is UK retailer Next - and not just because I have been using it as an example for years and never actually got around to buying it…But the shares have had a solid persistent trend for almost five years now.
There is no reason why someone could not have tried to capitalise on those movements over the medium term – weeks and months – using spread betting, for example. Yes, you pay a slightly wider spread and because you are trading on leverage there is a financing cost element. But there is no commission, you still receive a credit if the company goes ex-dividend, you are tying up a relatively small portion of the overall value of the position leaving free capital for other opportunities and gains are tax-free with no stamp duty to pay (Tax law can of course be changed and depends on individual circumstances. Tax law may differ in a jurisdiction other than the UK).
The net result of all of this is it can actually work out cheaper, for a medium term position over a few months, to carry out the transaction using spread betting rather than through a traditional broker.
I think spread betting and its variations can be one of the first experiences many have of a short-term approach to markets. Trying to be a day trader can be a frustrating exercise as you get wrong-footed by just the day to day volatility, and stopped out frequently. So, do not be afraid of taking a step back, looking at the bigger picture via a longer-term time frame and giving the market more room to prove you right. This approach does mean wider stop losses, but as you can start from as low as £1 per point you can tailor the level of financial risk to hopefully one that meets your tolerance.
Whilst these products aren’t really designed for long term buy and hold over many years, the point is that they can be a cost-effective way to take a position on a market over a few months. And the end result, if you are managing risk sensibly using stop losses, is you don’t have to be a slave to the price screen and can get on with something far more interesting instead.
David Jones is Chief Market Strategist at spread betting and CFD business IG. He runs regular online seminars about spread betting and the broader financial markets. To find out more about these products please visit www.ig.com
CFDs and spread bets are leveraged products. CFD trading and spread betting may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.