As i write this, I’m nursing a bit of a sore head and an empty wallet. In the last 4 weeks I’ve lost almost £30, 000 spread bet around an hour a day five days a week. So i managed to blow around £1, 500 an hour. That’s really quite a deal of cash. Actually, it’s not quite as bad as it looks. Fortunately, I was bet using a few spread-betting companies’ simulation sites. These are simulations of their live bet sites that allow you to practice before you start bet with real money. I realise i always am no financial genius otherwise I would have been rich previously. However, Allbet the fact that I managed to squander so much money so quickly does pose the question – if spread bet seems so simple, why do so many people get completely sold out extremely quickly?
We’re increasingly seeing advertising for spread bet in investing and money management publications. In the one I register for, around a half dozen different spread bet companies take full-page colour ads daily, outnumbering any other type of advertising. Spread bet ads are already common in the business sections of many weekend newspapers and will probably soon start to can be purchased in the personal finance sections. Spread bet could appear deceptively attractive to many savers. After all, money in a bank, shares or unit trusts will at best give us about a miserable five per cent a year before tax. Yet a reasonable run on spread bet can easily let you pocket ten per cent a week – 400 per cent a year – completely and gloriously tax-free. So spread bet can let you earn in just twelve month what it would take a hundred years or more to achieve with most other investments.
Spread betters gamble on price movements of anything from individual shares, currencies and commodities to whole markets like the FTSE, Dax or S&P. It is called spread bet because the company providing the service makes most of their money by putting an additional spread around the price at which something is being bought or sold.
Spread bet appears to have many advantages compared to traditional investing:
You don’t have to buy anything – It allows you to bet on price movements while not having to buy the underlying assets – shares, commodities or foreign exchange.
It’s tax-free – When you buy or sell shares, get paid benefits or receive interest from a bank you will have to pay taxes like stamp duty, capital gains and income tax. Unless spread bet is your full-time job and only source of income, there are no taxes to be paid as it’s considered to be poker.
You can go long or short – When you spread bet you can gain just as much whether prices rise or fall, allowing you guess the direction correctly. With most other investments, you need the price to go up before you make a profit.
You can bet on a rise or fall at the same time – If the FTSE, for example, is trading at 5551-5552, you can place two craps bets, one that it will rise and one that it will fall. These only get triggered when the FTSE actually moves. So if it starts becoming greater, your bet that it will rise gets triggered. Similarly if it loses, only your bet that it will fall is triggered. So it can seem that, come rain or shine, you’ll probably win.
Huge leverage – If you bet say £50 a pip (a pip is usually the minimum price movement you can bet on), you can easily win around a half dozen times your original bet if the price moves in the right direction. On a really good bet, you can win much much more.
You can wait for the breakout – Prices on many shares, currencies, commodities and other things people bet on tend to experience periods of stability and then bursts of movement up or down, what spread-betters call ‘the breakout’. You can place a bet that is only activated when the breakout comes.
Loss limits – You can put conditions in your bet that prevent your losses outperforming your chosen level should your bet happen to be wrong.
You can adjust mid-flight – With most craps bets, such as with horse racing or on roulette, once the race has started or the croupier has called ‘no more bets’ you have to wait helplessly for the result to see if you’ve won or not. With spread bet you can choose to close your bet at any time. So if you’re ahead, you can take your takings; if you’re behind you can either cut your losses or wait in the hope that things will change and you’ll be up again.
Given all these properties of spread bet, it should be pretty easy carryout a fair bit of money without too much effort. But only if.
Industry estimates suggest that around three months per cent of spread-betters lose most or all of their money and close their accounts within three months of starting. There seem to be another eight per cent or so who make reasonable amounts of money on a regular basis and there are around two per cent of spread-betters who make fortunes. I’ve been to a few presentations run by spread bet companies and at one of these the salesman let slip that over eighty per cent of his customers lost money. Even many professionals lose on about six craps bets out of every ten. But by controlling their losses and maximising their returns when they win, they can increase their wealth.
Why it can go horribly wrong
There seem to be several reasons why spread bet is so efficient at dramatically demolishing most practitioners’ wealth:
The companies want you to lose – When you first open a simulation or real account, you will get several phone calls from extremely friendly and helpful young men and women at the spread-betting company asking if there’s anything they can do to assist you to get going. This is customer service at its very best. The majority of people contacting you will parrot the line that they just want to help and that they’re happy if you’re successful as their company only makes money from the spread. Some will reassure you that they want you to win as the more you win, the more you’ll probably bet and the more the spread-betting company will earn. This may make you feel good, tell you that the company is open, honest, trustworthy and supportive and encourage you to use them for your bet. But it’s also a lie. It’s true that the company might make a lot of its money from the spread. However, with many of your craps bets, you’re bet up against the company they usually hope you lose, big time. In fact, during the last month I’ve seen several companies change the conditions on their sites to make it very likely that people using them will lose. So, lesson one – spread bet companies are not your friends. The more you lose the more they win. It’s that simple.
It’s difficult to break even – If you bet say £50 a pip and the price does go the way you want, the spread bet company takes the first £50 you win. So the price has to move two pips in the right direction for you to win your £50 back and three pips for you to emerge with £100, doubling your money. If your price moves three pips in the wrong direction, you lose your original bet plus £50 a pip, giving a total loss of £200, a loss of four times your original bet.
Losses can be massive – With most poker, you can only lose what you put down on a horse, blackjack or roulette. With spread bet you can quickly say goodbye to much more than you guarantee. I forgot to put a stop loss on one bet and managed to lose over £800 with just one £50 bet. Because your bet is leveraged, you can make both fabulous gains and excruciatingly painful losses. Too much it’s the latter. Your little friend size of many craps bets, often £5 or £10 a pip can lull betters into a false sense of security. It’s only when the losses go five to ten times the original bet that they realise the risk they have taken.
“The spread bet leverage means that you can get rich which is a wonderfully appealing idea, but it also means you can get poor which most people ignore. “
You can waste thousands on courses and systems – At one free spread-betting seminar I attended we were more than strongly encouraged to opt-in for a two-day weekend course teaching us how to spread bet successfully. This would normally cost (we were told) £6, 995, but there was a special offer for the first five people to opt-in of only £1, 997. There are many such courses and also ” experts ” offering to sell you their special spread-betting systems, guides, webinars and all sorts of other advice. With so many supposed experts apparently making a living teaching others how to spread bet, there ought to be a lot of takers. But I’ve found that all you need to know and more is available free on the internet. Mutually specialist said, ‘Don’t bother wasting your money on ‘Guru’ books written by so-called experts. Those books are crap and not worth the paper they are printed on. Nobody sells a secret trading system if they are really successful. The only reason these guys are writing books is because they didn’t make it as traders’.
It’s the bobbing about that beats you – We often hear on the news that the price of gold has considerably increased by a few dollars an ounce or the FTSE has slipped by a hundred and their late twenties points or that the pound has considerably increased by two cents up against the dollar. These reports make price changes on financial instruments sound like smooth movements either up or down. However, the prices of shares, stock markets, commodities and currencies don’t often come in straight lines. They jump about every few seconds. So, if the FTSE is in 5540 and you correctly bet £50 a pip that it is going up to 5545 you may not necessarily win £200. In between going from 5540 to 5545, it might drop down a couple of times to say 5535 or lower. If you have a stop loss on at 5536 or 5535 to avoid losing too much money, your stop loss will begin working and you’ll lose £250 or £300 even if the index did subsequently move higher as you predicted. I’ve placed over a hundred craps bets to test whether I won when my craps bets were right. On about eighty per cent I lost in spite of being right because the fluctuations triggered the stop losses even though the index did actually move from where it was to where I predicted it would go. This creates a rather odd situation where stop losses can unfortunately make you lose even when you should be winning. Yet if you don’t put stop losses on and things go in the wrong direction, your losses can annihilate you.
It attracts losers – At the spread bet seminars I’ve attended, I’ve been shocked by the number of low-paid workers – waiters, porters, kitchen staff, healthcare assistants and impoverished, would-be writers like myself – who decide to have a go at spread bet as they believe that, apart from winning the Lottery, it may be the only realistic way they have of making some cash. These people will be bet with their meagre life savings against extremely sophisticated financial services insiders with vast knowledge, many years experience and amazingly deep pockets. It’s not difficult to guess who is going to win.
Sucker or smartie?
Spread bet is a ‘zero sum game’. Unlike depositing our money in a bank so it can be lent to businesses or house-buyers, spread bet doesn’t create wealth. It just redistributes money from the suckers to the smart. When contemplating whether to try your hand at spread bet, you need to work out whether you are likely to be in the three months per cent who end up as suckers or the ten per cent who make money too . smart. I found it interesting that not a single one of the amiable young men and women from spread-betting companies i always spoken to actually did any spread bet themselves. By the way, when i did eventually open a live spread bet account and managed to win about £100 a day for ten days, the spread bet company started preventing me getting out of losing craps bets because they claimed I was “betting unfairly”. However, if you do manage to spread bet successfully, please drop me an email, I’d love to find out how to do it.