Spread betting risks

By Deputy Editor Tim Bennett Dec 17, 2009

Tim Bennett

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Spread betting can be a fun, fast way to make a tax-free profit. But ignore the risks, and you can also lose your shirt. Here are three ways to keep yours.

Limit orders

Professional traders use a huge range of orders but you should be aware of just two initially. First off the market order. Say you buy ('go long') the FTSE 100 using a spread bet. Your order will execute very fast at, or close to, the current market price. Fine, but in a volatile market this may not be the price you are expecting. So you could be racking up losses within seconds.

So when conditions are volatile (the start of the day is a good example as overnight orders all pile into the market together) either steer clear and wait for things to calm down, or use limit orders. These allow you to place an order at a 'no worse than' price. For a buy order on the FTSE 100, this would be, in effect, an instruction to your broker to "open my up bet but no higher than 5,300 points" [or whichever price you choose]. The downside is your order may never execute, or take a while to do so, but at least you know the price you will trade at.

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Stop losses

If you bet on a rising FTSE 100 using a spread bet, your risk is that it subsequently plummets. This might happen while you are in a meeting or playing golf, so you have no way of knowing, let alone stopping your position from racking up losses. Or do you? A stop loss order – for which you typically pay a small premium in terms of a slightly wider spread – limits the damage. In effect, it says to your broker "get me out if the market hits x".

One step on is the guaranteed stop. The plain vanilla stop order may not get you out at the price you expect if it is competing with lots of other similar orders. That's a particular risk in volatile periods such as the credit crunch last year. But for a little extra on top your broker will guarantee to get you out at the price you specify.

Spread watching

The beauty of spread bets is they allow you to bet on almost anything – house prices, election outcomes, even the weather. But there's a catch. The more obscure the bet the wider the likely bid-to-offer spread in "pips" or "ticks". So always check this before placing a bet or you'll need a huge shift in your chosen bet target to just break even and recover the spread.

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Published in Spread betting explained | More articles by Tim Bennett

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