Cheat Sheet
Financial Spread Betting For Dummies (UK Edition)
Keen to have a go at financial spread betting? You came to the right place. Whether you’re a seasoned investor looking to pick up on a new way of making money, or a complete tyro in the financial markets, this Cheat Sheet is here to help you get your key decisions right.
Understanding the Types of Financial Spread Bet
A highlight of financial spread betting is being able to trade in a wide range of market types and geographic locations. Once, dealing in foreign shares could be logistically quite difficult, but the Internet has changed all that by giving traders online access to markets in different locations and in different time zones.
Financial spread betting takes this one step further by allowing you to deal in products from all around the world from a single trading platform – which means you can build trading strategies for just about anything.
Here are the main types of spread bets:
Commodity bets: These have been around for some time, but have become more popular in recent years as the commodity boom has brought the world’s attention to this investment category. Commodity bets enable you to trade products like crude oil over a long trading day, which makes these spread bets very convenient. Commodity bets also offer very good portfolio diversification for traders.
Foreign exchange (FX, Forex) bets: This is a very popular trading tool offered by most providers. In this market you’re dealing in the relative value of two currencies (the exchange rate). The market is very liquid (meaning it’s very easy to get in and out of trades). Foreign exchange spread bets are available to trade 24 hours a day, often six days a week, so you can trade at any time that appeals to you.
Index bets: Index spread bets have become very popular because they allow traders to take exposure to the wider market in a single trade by placing a bet over an index. This may be something like the FTSE 100 Index or the Dow Jones Industrial Average in the United States. Index spread bets are typically available to trade all day and much of the night.
Interest rate bets: Interest rate (or money market) spread bets enable traders to access a market that most traders may not have dealt in before – the interest rate securities market, with a particular emphasis on short-term notes and longer-term bonds. While the underlying instruments may have a specific term (for example, ten years), this isn’t an issue for spread betting, where you’re only interested in capturing the price movements. Interest rate bets can offer real benefits to traders in the form of diversification.
Share bets: For budding spread bettors share bets are likely to be the first step, because they’re the most similar spread bet to a market you should already be familiar with – the share market. Share bets enable you to trade the price movements of domestic markets and most of the larger foreign markets. Share bets are available to trade during the same hours that the underlying market is open – so if you want to trade US markets, you’re in for a late night.
Choosing a Financial Spread Betting Provider
A wide range of financial spread betting providers compete for your money in the UK – from specialist firms to stock brokers, financial advisers, banks and bookies. On the upside, the number of providers on offer means they need to compete harder on price and service levels to keep your business. But it also means that you need to do your homework to ensure that you’re dealing with a firm that’s reputable and will manage your account fairly.
The following info helps you compare providers to make the best choice for your needs.
Margins and spreads: Price – the width in points in the spreads on popular markets – has become an increasingly competitive aspect for brokers, with many now offering only one point or even zero point trading on indices. In addition, margin rates vary. If you imagine your trading will be focusing on one or a small number of markets, shop around to see who’s able to offer the best rates.
Education: Some firms offer more education than others. If you’re new to spread betting, you may want to start trading with a firm that can provide free educational material such as podcasts, guides to trading and seminars to support you early on. This can include webinars if you live too remotely to get into a major town.
Range of markets: All spread betting firms aren’t created equal in this respect – most offer the favourite markets, like the FTSE 100 and the GBP/USD currency pair, but if you’re looking for something more esoteric, like rough rice or a mid-cap share, the larger firms are more likely to be able to help you.
Trading platform: Many of the leading brokers now offer proprietary trading platforms, but some are better than others. Increasingly, the platforms are web-based, but older versions require downloading onto a computer. Other firms use third-party trading software.
Mobile trading: In the last few years mobile trading has become an important factor in spread betting, with some brokers reporting over a third of their bets now coming in via mobile devices. Brokers tend to launch trading apps for the iPhone and iPad first, and then follow with Android after these have been successfully road-tested. If you think you’ll want to trade on the move, check whether mobile trading facilities are available.
Stop losses: See the later section on ‘Placing Orders’. Some brokers are better at honouring your stops than others. Most of the time, this depends on the liquidity of the underlying market and the broker’s ability to hedge risk, but generally speaking, brokers are quite efficient at this. Some now offer guaranteed stop losses. One of the best ways to check out how good a provider is at executing stops is to talk to other traders online – there are plenty of trading forums where you should be able to find current and former clients of most of the UK spread betting firms.
Demo accounts: Some firms now offer demo accounts that let you trade with play money, helping you to hone your skills and learn on their trading platform. The degree of access you’re granted varies – some only let you trade a small number of markets, and others expect you to fund your account after a period of time with real money.
Depending on your provider, you may receive the software for free or pay a fee. Some brokers charge for the software, because they need to pay the company that provides them with the software. However, charges are often negotiable and depend on how much business you do with the provider during a month. The more trades you make, the lower the software charge you pay.
Keeping Up with What Affects Financial Spread Betting
No matter what products you’re trading in your financial spread betting adventure, you always need to know about anything which might affect the way prices move.
The following roundup highlights some of the key market and economic factors that traders look at when considering whether to buy or sell commodities and interest rate products:
Energy stocks: Nothing moves energy prices more quickly than geopolitical tensions. The market immediately assumes that supplies are going to be limited, so prices rise.
Several regular reports impact the market when they’re released, particularly the US Department of Energy inventory report. This report outlines the status of US supplies: if supplies are lower than expected, this tends to have an upward impact on prices.
Seasonality broadly impacts on prices too, particularly the northern hemisphere winter. If the weather is colder than expected, demand for heating oil rises, pushing prices higher. OPEC decisions also impact oil prices. The general rule is that when OPEC reduces supplies, prices go higher; and when OPEC increases supplies, prices go lower.
Grains: Much of the wider price impacts on grain prices come from the stocks that are available at the end of the growing season. The lower the stocks, the higher the price. The US Department of Agriculture releases crop reports regularly to help with estimates. Not surprisingly, the weather impacts on prices too, with less-conducive growing conditions increasing prices due to short supplies.
Industrial metals: In general terms, the higher the overall level (and expected future levels) of global economic activity, the more industrial metals will be in demand. When you consider that industrial metals have such a wide range of applications, you may wonder how countries can achieve economic growth without them.
Livestock: Some of the same factors that affect the grain market impact on the livestock market. A colder season can see cattle gaining less weight, which makes them less valuable to farmers. In addition, a bad growing season for corn and soy beans may see prices for feed climb, and if cattle prices aren’t high, farmers may prefer to sell their cattle cheaply rather than pay for expensive food – which can negatively impact cattle prices.
Precious metals: Demand for precious metals can come from the industrial side of the market, the retail side of the market and from investors looking to store value. Some of the key holders of gold looking to store value are the central banks around the world. Central banks choosing to buy or sell gold can have a large impact on supply and demand. The state of inflation globally can also have significant impacts on gold prices as other participants in the market try to hedge against weakening currencies.
Treasuries: Inflation is one of the major factors that impacts on the yields paid by treasuries. In most treasuries the interest payment is a fixed amount, say £4 per £100 bond: the yield is simply the return expressed as a percentage (in this case, 4/100 ×100 = 4 per cent). This relationship means that as the price increases, the yield decreases, and vice versa. This is referred to as an inverse correlation.
If you hold a treasury that pays 4 per cent per annum and inflation is running at 3 per cent per annum, you’re making a real return (the return you receive minus the rate of inflation) of 1 per cent. If inflation rises to 4 per cent, your real return is 0 per cent. As inflation and, equally importantly, inflationary expectations increase, so too do treasury yields to compensate for the negative impact of inflation.
Knowing Your Financial Spread Betting Orders
After you decide which type of financial spread betting provider fits the bill for you, you need to examine the ways in which you can manage your account and your trades. One of the main areas of spread betting that new traders often find a bit of an eye opener is the wide range of different orders available. An order is an instruction from a trader to the provider to buy or sell a specified item in a market.
Spread bets are generally a non-advisory product, which means that you’re totally responsible for making all your trade decisions and placing all your orders. We strongly suggest that you set yourself a routine for placing orders, such as always reading your order back to yourself twice or even saying the order out loud, to ensure that you aren’t betting £100 a point when you want to bet £10. Such a huge error takes the fun out of your day very quickly indeed!
Market orders: A market order is an order to buy or sell immediately at the current market price. Market orders are probably the most commonly used orders because they allow you to get in and out of the market immediately.
Stop orders: A stop order is an order to buy when the price has climbed to or above a specified stop price or to sell when the price has dropped to or below a specified stop price. The stop order is one of the most important orders available to traders because you can use this order to manage your risk by selling automatically when the price reaches a level that you nominate.
Stop loss orders: A stop loss order does exactly what the name implies – it stops your loss. The reason a stop order isn’t always a stop loss order is because you aren’t always going to use the order to stop a loss – you may also use the order as a stop entry order.
Contingent orders: The broker executes a contingent order only if it is instructed by you to execute another order first. Contingent orders are used in a similar way to stop orders. Effectively, you are asking the broker to execute one order only IF another order happens first. If this happens, you are saying, then do this. By using a contingent order you’re saying that if the market trades at a certain price then your provider should automatically place a market order – which is how a contingent order behaves in a way similar to a stop order. If your provider offers this type of order instead of stop orders, you can use it as your primary means of managing your risk.
Limit orders: A limit order is an order to buy at no more than (or sell at no less than) a specified price. You use a limit order if you want to deal at a price below the current level (that is, if you want to go long – meaning to benefit from a rising price) or above the current price (that is, if you want to go short – meaning to benefit from a falling price). This means that you trade only if the price moves to the level that you nominate.
Requotes: A requote occurs when the market is moving quickly, and the provider does not want to offer you the spread bet at that price. A requote isn’t an order type in itself; it’s something of a subset of orders. The provider will usually either offer you an alternative price, or simply say the price you wanted to open the bet at is no longer available. It is rare for this to happen these days, as many of the biggest providers now use highly automated systems for calculated trades. It can also happen if too many traders are taking the same position, and the provider is finding it difficult to hedge this in the market.
Guaranteed stop loss orders: Using a guaranteed stop loss order (GSLO) from a provider helps you manage your risk even more effectively than with a regular stop order, because you pay extra to ensure that if you get stopped out, you know at exactly what price it will occur. The benefit is that even if large price gaps develop (perhaps triggered by a large fall in the US market overnight), you have the assurance of knowing where you’ll get stopped out.The downside to using a GSLO is that you have to pay a premium upfront whether the provider executes the order or not.
If-done orders: An if-done order is an advanced order type that allows you to connect two different orders together, such as a limit order and a stop order. As the name implies, if one order is done, the other order is placed. Using an if-done order enables you to plan much of the order set-up ahead of time and then execute the order automatically when certain conditions are met.
One cancels other orders: One cancels other (OCO) orders are designed to let you have two connected orders (to get you out of the market) surrounding a position that you already have. Most commonly, this allows you to either stop your loss (if the price moves against you) or take your profit (if the price moves in your favour). OCO orders are a really important order type for many traders, but if you plan to trade a 24-hour market like FX then they’re essential.