For most of us, investing in the movements of stocks, shares, commodities, currencies, government bonds and the like is something we leave to the professionals. If we do engage in these multi-million pound markets, the likelihood is that we will do so via a third party organization such as a pension provider or some form of endowment policy or investment product. In this way we are all investing in the markets – even if we take a hands-off approach to that investment.
Increasingly, however, there is a trend for getting directly involved with the market variations which give this sort of trading its impetus. Financial spread betting (FSB) is the latest vehicle to enable such a direct engagement with the market movements that underpin our national and indeed international financial well-being.
Ever since the Thatcherite loosening of the barriers to entry to share dealing in the 1980s the public appetite for trading has been on the rise. As the derivative-based logic of the trade floors once reshaped the sports betting industry – prompting the development of ‘spread’ betting itself – the wheel has turned full circle with the advent of a mechanism that allows the general public to bet on stock and currency markets on the same basis.
Spread betting works on the basis that an initial stake is simply a marker set against a volatile market position. The player’s position will effectively bet on which way the market will move and his or her return will reflect the extent of that movement. For example, a £5 initial stake will realise a £20 return if the market moves four points in the anticipated direction. If the market moves ten points the return will be £50, and so on.
The downside to this equation is that if the market moves in the opposite direction losses are calculated according to the same formula. Given the open ended nature of the contract spread betting is therefore anything but a safe bet. But it does have considerable potential for profit.
Because no stock is actually bought or sold during this process any returns are treated as a bet rather than an investment per se. That means that stamp duty and capital gains tax do not apply. For many serious investors this is seen as reason enough to use FSB, even though the market mechanisms are precisely the same as those used by professional traders. Hence, for example, tradefair spreadbetting makes use of the same Contract for Difference as are employed in the City.
The public appeal of this sort of approach to the financial markets is a direct corollary to the general surge in betting activity that interconnected technologies enable. Smartphone use is expected to increase eight fold by 2020 and it is that expanding market that FSB is increasingly being targeted towards. The proclaimed difference between FSB and a sporting spread bet is the volume of market intelligence that is available to inform any financial market assessment. Needless to say, the merits of that claim are open to debate.
For those attracted by this sort of direct connection with the markets it is worth noting that the major providers do offer cashless demo versions of their software that allow a risk free, hands-on trial of FSB. It is, admittedly a stimulating experience, but it is most certainly not appropriate for investors of a nervous disposition! On that basis the market for FSB is always liable to be limited, but for those of an adventurous disposition, or those confident in their market research and insight, it does offer an extremely direct means to exploit market volatility without recourse to all those professional intermediaries.