SPREAD betting was once seen as the domain of City dealers who had the knowledge – and the taste for risk – to gamble thousands of pounds on the direction of shares, indices and commodities.
However, as traditional savings and investments show poor returns, it has moved into the mainstream, as investors look for new ways to make money.
Spread betting allows investors to put their money on the movement of a share or other financial i
nstrument without actually having to own it. Clients profit on the difference between closing and opening prices – if they get it right. Recent volatility in markets has increased the appeal of spread betting. Investors can move in and out of bets quickly, as they don't have to physically buy and sell any stock. However, losses can be large if clients do not know how to set the lower and upper limits that will automatically trigger the point to get out of each bet.
Despite the risks, money is flowing into the sector. IG Group, whose IG Index is the UK's biggest spread betting platform, yesterday unveiled recession-busting profits and revenues for the year to 21 July, 2009. Its pre-tax profit jumped 30 per cent to £126 million and its revenue was up 40 per cent to £257m.
Announcing IG's results, chairman Jonathan Davie said the growth had been achieved against a "backdrop of chaos in financial markets worldwide, and severe global recession".
Rival firm CMC Markets, 10 per cent owned by Goldman Sachs, is opening 4,000 to 6,000 accounts for private clients each month. Irish company WorldSpreads launched a Scottish office last month to offer potential investors face-to-face training.
Part of the reason new clients are being attracted to spread betting is because the recession has changed their attitude towards investing. IG Group chief executive Tim Howkins told The Scotsman: "The long-term buy-and-hold approach has become slightly discredited in a bear market. The stock market is about investing in equities, but people are now more interested in a broader range of assets." On IG Index, investors can take a punt on anything from stock indices to interest rates and the movement of house prices. Clients do not commit themselves to a long-term investment with no easy get-out if markets start to fall. Spread betters can place a punt with as little as a pound and move quickly if the situation changes.
A big draw of spread betting in the UK is the fact that it is classified as gambling, which means profits are free from capital gains, income tax and stamp duty, and no commissions are paid.
CMC Scottish manager Mike McCudden said tax-free investing and ease of access were two factors attracting punters to the market. Although CMC closed its office on Edinburgh's Princes Street less than a year after it opened, McCudden operates from a base in Glasgow looking after around 2,000 clients.
He explained: "It's simple to set up an account and clients obviously don't have to pay broker fees. Spread-betting gives clients more control over their investment than more traditional routes."
While the majority of spread betters are still based in the south-east, more Scots are getting on board. Firms such as CMC, IG and World Spreads regularly hold seminars north of the Border. That and online training help investors avoid expensive mistakes. Clients are told how to set "stop losses" so that a trade will automatically be sold if a share price, for example, falls to a certain level. Firms also "close out" clients to reduce potential bad debt.
Hawkins said: "It's been a myth for a long time that only those who work in the City have been spread betting." He added that IG's clients tended to be professional mid-to-senior management and the market was far from saturation. Women in particular remain untapped: both IG and CMC say about 90 per cent of their clients are men.
