What do you need to make Spread Betting easier ?

17th Mar '15 by Edward Croft

14 comments 8531 reads

One of the things that always annoys me about spread betting is the difficulty of figuring out your exposure & bet size. It's not hard to calculate but you always have to think for a while... if you are in a rush it's so easy to stick on a massive position in a stock by mistake.

What many people don't realise is that a bet size of £10 per point will give you an underlying exposure of £26,000 in a high priced stock like Berkeley Group, but only exposure of £270 in a low priced stock like Laura Ashley. That's probably one of the reasons why IG Group is so insanely profitable - most punters have no idea the leverage or the position sizing.

Just thought I'd quickly ask regulars what they'd find useful in terms of spread betting tools ? I've got my own calculator which links into some stock screens to calculate equal weighted point sizes across the board. It's pretty handy. I'm working on gathering essential info like margin factors, point size, min bet size etc from spread betting firms for more accurate automation.

If there are any features people want or need to make spread betting easier - let us know here.

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luckystrike23

17th Mar '15

I think this should help:

What is a Point/Pip/Tick? http://www.financial-spread-betting.com/Point-pip-tick.html

Note that Ayondo actually allows you to compute the bet size based on the amount you want to risk and that makes risk management easier http://www.financial-spread-betting.com/spreadbetting/Ayondo-compare.html

rick

Couple of things:

1. A Stockopedia guide to spreadbetting with shares - concentrating on running a portfolio in a SB account calculating exposure safely. e.g. covering things like calculating total exposure, How to create a market neutral long/short (hedge) strategy. It is so easy to mess up!

2. A portfolio tool (in Folios) that allows you to have both conventional share entries as well as SB positions alongside. e.g. you might realistically have 20 shares 10 held in your ISA and 10 as SB's. Would be helpful
to see them all as one entity, or in separate portfolios.

mpat89

I think people need to understand the difference between the spreads on buying and selling in a spread betting account (particularly applicable in less liquid shares where the difference can be significant).

People also need to understand the additional financing costs they will incur by getting their exposure to a stock via spread betting versus an equity, fully paid shareholding.

AlanJenkins2

I only use spread betting in shares to take short positions.The reason why I prefer to do that [as opposed to conventional shorting] is that it saves me from actually promising to deliver shares that I do not actually have - I am instead merely betting that the shares will fall.
As Ed has correctly pointed out,there are many shares that IG will not allow you to 'short' on their platform.Any advice on alternatives,anyone ?

Edward Croft

Yes - I rarely short individual shares at all - but the QVM long/short performance to date has made it very tempting. It seems though that IG has made it far harder to short shares since about 2011. You can barely short anything below about a £2bn market cap it seems.

We will definitely be supporting spread betting in portfolios in due course. Not promising on timeline though... but we are working on this, hence the thread !

Edmund Shing

18th Mar '15

Hi Ed,

what would be very useful is an estimate of how much it costs to get in and out of a share in terms of the spread, and comparing this to the cost of buying a share in cash (including stamp duty).

Also I wonder if dividend harvesting via spread betting is not more efficient, e.g. for a higher-rate taxpayer... But I can't remember what IG deduct from the share price when it goes ex-dividend, the gross dividend or net, and if so assuming what tax rate on the dividend...

Clearly this favours large-caps over smaller-caps, but would be interesting to know at what point in the FTSE 250 buying with cash becomes cheaper (ignoring the financing cost)...

Edmund

One other thing Ed, if there is any easy way, it would be interesting to have a list of the most heavily shorted shares in the UK, by total shorted and by % of market cap. shorted, i.e. short interest...

because one key factor to know before shorting any share is how crowded that short already is... to gauge the potential for a short squeeze either for someone looking to short, or for someone looking to go long to exploit any short squeeze...
Edmund

Edmund - we've been working on our Smart Money product for some time, which includes short data - but which is yet to go live. We are getting it from the LSE's database of notified short interest... which is ok, but isn't entirely perfect and can be inaccurate. Markit do a much better short database - but from what I gather it's based on polling hedge funds rather than public notifications.... and too expensive for us.

Great points above ... thanks & will investigate.

TrickyTrader

2nd May '15

It is very true that even if you put all your trade at £1 per point then you may end up with a very unbalanced portfolio but it's more than just the bet size.

Daily range play as high importance as the size of the bet. For example, if you trade currency and oil then your exposure can be the same but oil can easily swing 2%-4% whereas it is very highly unlikely to happen in GBP/USD as even 2% swing is considered to be rare. One has to always remember about the role in financial spread betting and how to manage the risk - http://www.independentinvestor.com/spread-betting/... .

Even if you use orders, you still have to remember that 20 points swing might be a lot for some instruments whereas for others this swing is small and easily can happen even during the quiet times. More on orders here - http://www.independentinvestor.com/spread-betting/... .

Risk and leverage risk managements come hand-in-hand in spread betting and one has to make sure they understand their full exposure.

shipoffrogs

I thought 90% of spread betters lost money. If so, isn't that all you should be pointing out on here.

Novice Investor

The vast majority of losing bets are on indices, not when using it as a vehicle for buying shares.

I know four millionaires who made their money in spreadbetting and have, legally, not paid a penny in tax. Why do so many people have this unreasoned opposition to spreadbetting?

It's possible to drown in a few inches of water, but you wouldn't tell people not to go into the shallow end of a pool.

I must go;I've now got the overwhelming urge to watch an episode of Kung Fu.

Where did I put those ping pong balls...

Blissgull

3rd May '15

Novice Investor, I am one of the people who has what you describe as an "unreasoned opposition to spreadbetting" but i dispute that it is unreasoned.

I invite you, or anyone else here to actually provide evidence and valid research which contradicts the belief that most derivatives traders (including spreadbetters) lose money. Do not use unverifiable anecdotes, show us valid research.

It is hard to get find research in this area, but there are a few studies we can look at.

In the USA, FOREX brokers are required to provide quarterly statistics showing what proportion of their "active" client accounts are profitable. You can find them at this website.

http://www.financemagnates.com/forex/brokers/exclusive-us-q1-2015-forex-profitability-report-more-accounts-and-profits/

As can be seen, for most quarters less than a third of "active" accounts are profitable. Two thirds are loss making. However, remember this is only for "active" accounts. It does not include the accounts which have become dormant when the trader has abandoned trading after losing too much. In addition even a losing account is likely to have a few winners. If over each quarter roughly two thirds lose and one third gains, then over three quarters most accounts will have two losing quarters and one winning quarter, and will probably be losing money overall. The figures seem to support the belief that at least 90% of traders lose money.

In Taiwan a study titled “The Cross-Section of Speculator Skill: Evidence from Taiwan” was published in 2011 analysing the performance of margin traders in Taiwanese shares. The study concentrated on day traders rather than longer term margin traders. The study concluded:

“In the average year, 360,000 individuals engage in day trading. While about 13% earn profits net of fees in the typical year, the results of our analysis suggest that less than 2% of day traders (1,000 out of 360,000) are able to outperform consistently.”

Another study “The profitability of day traders” by Douglas J. Jordan and J. David Diltz, published in 2003 concluded.

“We used two distinct methodologies to examine the profitability of a sample of U.S. day traders. The results show that about twice as many day traders lose money as make money. Approximately 20 percent of sample day traders were more than marginally profitable."

Finding reliable statistics in this area is difficult, but I invite anyone here to actually show us these millionaires who have made their fortunes with spreadbetting. In the meanwhikle I will leave an anectdote from David Bulk of Cantor Index.

"there were 11 people who were made millionaires between 1998 and 2000 during the bull run when the markets rose significantly, according to David Buik of Cantor Index. But all bar one of them gave it back through other bets."

Think about that. In the dotcom bubble, perhaps the most dramatic bull market in history, just 11 of Cantor Index's customers made a million, and all but one gave the money straight back in other bets. That is what spreadbetting does. It is alluring and addictive, and even when you win, it is not that the markets are giving you money. They are just setting you up for a bigger fall later.

shipoffrogs, you're absolutely right that 80%-90% of traders lose money and it's not only spread bettors due to various reason.
But when I was a child and was learning to walk, I stumbled plenty of times... it didn't mean that I should only craw... Does it?
Financial spread betting is just a medium to trade on margin and it's up to traders to learn to trade and manage the risks.

Paul Scott

5th May '15

Hi Guys,

I lost about £5m on spread bets in 2008, so have come up with some useful tools, as indicated in my talk at Mello Peterborough.

People might find this spreadsheet helpful - pls feel free to copy & use yourselves - it's all about managing risk;
https://docs.google.com/spreadsheets/d/1L1wNgQxyJCksyCSMdwPXfYSCUEdwRr17m3I2-Gb8UCk/edit#gid=0

Kind Regards,
Paul.
P.S. I'm still using the same brokers - when the shit hits the fan, in 2008, I answered the phone. My broker today, Richard, says that I was his only client who answered the phone, everyone else hid from the crisis. Lesson from the crisis in 2008 - deal with it. Man up. I recall sending TT after TT, £10k, £20k, £40k, until there was nothing left. It was awful. I had to sack the cleaners, the gardeners, everyone. 7 cars had to go down to 1. You know what? Life goes on! It's just stuff. Doesn't matter. In 100 years time we will all be dead, and Earth will still be orbiting the Sun! And the Universe is teeming with life, and the distances astronomists consider routinely are beyond the comprehension of most people! This rock is tiny! TINY!

What do you need to make Spread Betting easier ?

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Edward Croft

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