I‘ve heard spread betting owes its origins to those dealer types in London who’d bet on two flies crawling up a window pane!?
Spread betting in itself is a legal and licensed financial product although it sometimes regarded as being risky and gets a bad press in many investment circles. The problem is not the trading product but the people using it and promoting spread betting. You as the punter can decide whether a spread betting quote is good or bad. That is is always your choice. the spread betting companies are competing for your business so unless spreads are consistently good you will just go elsewhere. Why do I say the people promoting spread betting? Well, for example you might have stumbled across advertisements for trading systems or courses claiming to teach you how to make a bucket load of money through spread trading by putting in less than 15 minutes a day. I am worried when I see this because I see that our human nature ticks us into focusing on the glamorous headlines of potential returns whilst blinding us to the dangers of leveraged trading.
The problem is that most people tend to dive into spread betting head-on without any education and leverage themselves to the maximum. Some see spread betting as a way to get out of their boring 9-5 hour mouse trap jobs. Typically, they aren’t adequately capitalised and new investors tend to only see the potential high returns, whilst ignoring the risks. This is a recipe for disaster.
I’m only guessing here, but I suspect that the reason that spread bets sometimes get a a poor reputation is that because you can open an account with a very small deposit. This leads to newbies practicing little or no money management and after a few trades the initial funding is lost. If you had to open an account with say £5000 minimum you would be inclined to take it more seriously. This is why though I can agree and understand the oft quoted ‘do not trade with money you can’t afford to lose’ when its applied to very small accounts this can lead to risk taking, as if you do lose, it’s no big deal.
When looking at the advantages and downsides of financial spread betting, investors tend to compare it with investing in securities and shares trading, often reaching the conclusion that investing in shares is more ethically acceptable simply because financial spread betting has ‘down-market’ connotations, however this is very different from the truth.
Investor buy shares in a company simply because they believe that the price will rise in the future, translating into a profit for them in the process. What some investors fail to realise, however, is that spread betting is formed of exactly the same strategy, with the additional benefit of not having to pay the 0.5% stamp duty that would otherwise apply to buying shares and extra tax benefits (in particular no CGT tax for spread betting gains in the UK and Ireland).
Spread betting gets a bad reputation from short term losers, but I’ve traded the actual FTSE futures and the advertised 0.5 spread usually doesn’t exist and they are choppy as hell.