 Spread betting started life as a fun sideline for City traders back in '80s London and has since developed into a multimillion-euro industry. It not only allows traders to speculate on which way a market will move – enabling people to profit from changes in share prices, stock indices, commodities and currencies – it also embraces speculation on political events such as the result of a general election. The popularity is explained by the fact that spread bets are traded on margin, which means that those who get it right can make large tax-free gains from a relatively small outlay. It is much like someone taking out a big mortgage to buy a substantial property. A report last year by the Cass Business School put the number of spread-betting accounts in the UK at 400,000, although insiders suggest that only a quarter of these are actively traded. Chris Brady, one of the co-authors, said: "The industry has considerable potential to grow, but to achieve this it needs to move towards the mass market." There are numerous white-label spread-betting services but only around ten actual providers. The largest are IG Index and CMC Markets. All are based in the UK, where the favourable legislation means that client gains are free of tax. In much of Continental Europe the tax position is unclear, so to avoid the confusion these companies have opted to offer contracts-for-difference (CFD) instead. CFDs are similar to spread bets and have all the same advantages with the exception that profits are taxable. It is difficult to put a figure on the size of the industry as few of the participants are publicly listed. The main exception is the IG Group, which is thought to account for around 40% of the market. In the year to May their total revenue from spread bets and CFDs was €175m. Most of this was generated in the UK with Continental Europe accounting for about 10%, though this should increase. Spread betting and CFDs were initially designed for active short-term traders, but today these products enjoy a more widespread appeal. This reflects the growing media coverage as well as the increasing number of investors who are taking more of an interest in managing their own money. Technology has also played a crucial role in allowing these services to be delivered online. It is estimated that about 40% of clients use spread betting as an alternative to more traditional forms of investments. These are mainly white, middle-aged males, although the proportion of Asians and women is increasing. The remaining 60% ranges from high-net-worth individuals who seldom trade, to students and others who like to gamble. As all homeowners know, when prices go up it pays to have as large an exposure to the market as possible. The main risk with this type of approach is if prices move unfavourably it can lead to large losses. People can guard against this by being sensible about the size of their bets and using orders known as stops, which will automatically close a loss-making position if the price hits a certain level. |