Pros and cons of spread betting

In UK, spread betting is unique as it offers tax-free earnings on short moves, while, the US markets are one of the most volatile markets. It is preferred by the investors because it can hedge exposures. It can be opted for hedging equity or stocks, portfolio or currency. In case of equity hedge, the investors can short single stock but there are risks of unlimited losses. Similarly, in the portfolio hedge, the investor can protect the tax free portfolio but one may have to pay the index overnight funding charges. In case of currency spread, the risk reduces in trading but it is highly complex.

The leading exchanges for spread betting are Dow Jones, NYSE, S&P, and NASDAQ. The companies having highest market cap and most liquidity are selected for betting. The leading brokers are - IG which accesses 15,000 markets and allows to trade outside the normal hours. It has a forex trading exchange and local offices in US. Recently, the minimum bet size was reduced for the key indices, FX markets and commodities by IG Group as that helped traders who wanted to gradually enter this market.  The company said it introduced close out procedures, added negative balance protection and standardised risk warnings to increase clients’ earnings.

City Index, Spreadex and ETX are other providers who cover a number of markets. ETX is one of the growing platforms offering a number of stocks. The platform offers more than 3,000 instruments and the application is based on LCG technology, which offers access to many brokers to get some of the tightest spreads.

The spread betting model may be based on A book or B book models where A Book involves low risk approach and B book is given to the customers who always loses money in such trades. Many investors lose due to greater trader risks, and mostly the investors are advised to use only a part of the total investment amount to prevent risks.  

Regulators tightened rules on products where anyone could make highly leveraged bets using a bank card through apps or online platforms to reduce risks. The changes in regulations and tighter regulations on betting hit shares of CMC that lost one-fifth of the share value on Sep 25th.  The betting firm were previously hit by the EU’s securities changes, where a ban on the sale of binaries for retail customer was introduced and this led to concerns overs losses in inherently risky products.

CMC started investment firm in 1989 and the new changes hit the shares of the company that reduced by 20 per cent in early trades on Sep 25th.  CMC said the total revenues from such trades i.e. spread betting and CFDs is expected to be 20 per cent less as compared to estimate.

These products account for 88 per cent of the Morgan Stanley revenues and the changes will lower profits by 20 to 25 per cent. Basically, these can be owned without owning the underlying assets, although, new changes will be beneficial involving only the larger players.

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