Spread betting developed in the 1970s as a hobby of off-duty City traders, initially focusing on the price of gold. The following two decades saw diversification into forex, sports betting and equity, which remains the main focus of spread betting today. It represents a tax-efficient, albeit highly risky, way to speculate on financial markets as profits are not subject to UK capital gains or stamp tax, and no actual purchase of stock occurs.
A spread bet is a bet placed on whether an outcome will be above or below a spread of values determined by the spread betting company used. Financial betting requires a bet to be placed at the offer price if you think the index will rise, or the bid price if you think it will fall. When the bet is closed the difference between the actual price of the index and the price at which you placed the bet determines the profit or loss you make. It is possible to make large profits from market movements in either direction, but also large losses.
The real boom in spread betting occurred in the late 1990s with the online revolution resulting in stock trading becoming accessible not just to professional traders but to anyone with access to the internet. This has resulted in a highly competitive market for spread betting providers, with narrow spreads and efficient customer service a key feature of the top businesses. The increasing interest in financial betting has continued since 2000, with a corresponding increase in spread betting companies. Over a four-year period between 2005 and 2009 the number of providers in the UK trebled. One company, GFT Global Markets UK, saw the number of daily bets placed increase from hundreds to tens of thousands when online betting was introduced.
The growth of spread betting in the UK has been so rapid that traditional stockbrokers have started to feel the effects, and some have set up spread betting businesses alongside their existing services. However, the volume of conventional trading in the underlying markets is thought to far outweigh that of spread betting. Since spread bets will be hedged with a CFD, in turn hedged using the underlying stock, traditional trade in stocks will not be adversely affected. In this way spread betting is seen as providing an alternative option mainly for the private trader rather than corporate or institutional investors.
To attract new customers providers pride themselves on ultra-efficient service and most will offer bonuses such as free demo accounts for newcomers to practise before placing real bets, and the opportunity to start accounts with as little as £50. Following a number of investigations and fines by the Financial Services Authority companies are starting to provide basic training and guidance for new customers to counter accusations that they provide insufficient warning of the risks of spread betting to inexperienced traders. The competitive nature of the market means that spread betting businesses rely on their reputation and service to maintain loyalty and attract new customers.
The recent development of apps and mobile trading platforms has allowed the top financial betting providers to tap into this market with a variety of mobile products, allowing customers worldwide instant access to their accounts and trading tools. This has been particularly popular with sports spread betting, as combined with the availability of live sports broadcasts it has the potential for a large increase in the number of bets placed. It is expected to appeal particularly to private traders, with its full potential as yet still unrealised.
Although hard to predict, it is anticipated that the growth in spread betting in the UK is likely to continue, but companies must continue to evolve with modern technology to maintain their place in the crowded market.
Article Courtesy of www.etxcapital.co.uk.