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Financial Spread Betting
03-23-2009, 09:40 AM
Post: #1
Financial Spread Betting
By far the largest part of the official market in the UK concerns financial instruments; the leading spread-betting companies make most of their revenues from financial markets, their sports operations much less significant. Financial spread betting in the United Kingdom closely resembles the futures and options markets, the major differences being:

• the "charge" occurs through a wider bid-offer spread;
• spread betting has a different tax regime compared with securities and futures exchanges - it is in fact tax free to the customer
• spread betting is more flexible since it is not limited to exchange hours or definitions, can create new instruments relatively easily (e.g. individual stock futures), and may have guaranteed stop losses (see below); and
• the trading is off-exchange, with the contract existing directly between the market-making company and the client, rather than exchange-cleared, and is thus subject to a lower level of regulation. Although the spread betting companies themselves are some of the most regulated entities in the City of London.
Unlike fixed-odds betting, the amount won or lost can be unlimited as there is no single stake to limit any loss. However, it is usually possible to negotiate limits with the bookmaker:
• A "stop loss" or "stop" will automatically close the bet if the spread moves against the gambler by a specified amount.
• A "stop win", "limit" or "take profit" will close the bet when the spread moves in a gambler's favor by a specified amount.
Spread betting has moved outside the ambit of sport and financial markets (that is, those dealing solely with shares and futures), to cover a wide range of markets, such as house prices.
In a falling stock market, financial spread betting can also be used by investors as a means of hedging against predicted losses in a portfolio of shares.


Financial spread bet example

Suppose Lloyds TSB is trading on the market at 410p bid, and 411p offer. A spread-betting company is also offering 410-411p. We use cash bets with no definite expiry.
For example, if I think the share price is going to go up, I might bet £10 a point (i.e., £10 per penny the shares moves) at 411p. We use the offer price since I am "buying" the share (betting on its increase). Note that my total loss (if LloydsTSB went to 0p) could be up to £4110, so this is as risky as buying 1000 of the shares normally.
If a bet goes overnight, the bettor is charged a financing cost (or receives it, if the bettor is shorting the stock). This might be set at LIBOR + a certain percentage, usually around 2/3%.
Thus, in the example, if Lloyds TSB are trading at 411p, then for every day I keep the bet open I am charged [taking finance cost to be 7%] ((411p x 10) * 7% / 365 ) = £0.78821 (or 78.8p)
On top of this, the bettor needs an amount (AKA margin) in the spread-betting account to cover the bet. Usually this is either 5 or 10% of the total exposure you are taking on but can go up to 100% on illiquid stocks. In this case £4110 * 0.1 or 0.05 = £411.00 or £ 205.50
If at the end of the bet Lloyds TSB traded at 400-401p, I need to cover that £4110 - £400*10 (£4000) = £110 difference by putting extra deposit (or margin) into the account.
The bettor will usually receive all dividends and other corporate adjustments in the financing charge each night. For example, suppose Lloyds TSB goes ex-dividend with dividend of 23.5p. The bettor will receive that amount.


Notable spread bets

Large fortunes have been made and lost from financial spread betting. Vince Stanzione is a well known spread bettor and made well over £2 million spread betting commodities.
A not so successful spread bet was placed by Mike Ashley on the shares of HBOS, which is reported to have lost £300 million. Ashley was long HBOS expecting them to go up when in fact they continued to drop before being taken over by Lloyds TSB.

Source: Wikipedia

"Depend on the rabbit's foot if you will, but remember it didn't work for the rabbit." - R. E. Shay
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