As i write this, I’m nursing a bit of a sore head and an empty wallet. Within the last few twenty eight days I’ve lost almost £30, 000 spread bets approximately an hour a day five days a week. So i was able to blow around £1, 500 an hour. That’s really quite a great deal of cash. Actually, it’s not quite as bad as it looks. Fortunately, I was bets using a few spread-betting companies’ display sites. These are simulations of their live bets sites that allow you to practice before you start bets with real money. I realise that i am no financial genius otherwise I would have been rich long ago. However, the fact that I was able to squander so much money so quickly does pose the question Allbet : if spread bets seems so easy, why do so many people get completely wiped out extremely quickly?
We’re increasingly seeing advertising for spread bets in investing and money management publications. In the one I enroll in, 4 to 5 different spread bets companies take full-page colour ads per week, outnumbering any other type of advertising. Spread bets ads are already common in the business chapters of many weekend newspapers and will probably soon start to appear in the non-public finance sections. Spread bets could appear deceptively popular with many savers. After all, money in a bank, shares or unit trusts will at best give us about a miserable five % a year before tax. Yet a reasonable run on spread bets can easily let you pocket ten % a week : 5 hundred % a year : completely and gloriously tax-free. So spread bets can let you earn in just a year what it would take a 100 years or more to achieve with almost every other investments.
Spread betters gamble on price movements of anything from individual shares, currencies and everything to whole markets like the FTSE, Dax or S&P. It is called spread bets because the company providing the service makes most of their money by putting an additional spread around the price at which something is being bought or sold.
Spread bets appears to have several advantages compared to traditional investing:
You don’t have to buy anything : It allows you to bet on price movements without having to buy the underlying assets : shares, everything or foreign exchange.
It’s tax-free : When you buy or sell shares, get paid dividends or receive interest from a bank you will have to pay taxes like stamp duty, capital gains and income tax. Unless spread bets is your full-time job and only source of income, there are no taxes to be paid as it’s considered to be playing.
You can go long or short : When you spread bet you can gain equally as much whether prices rise or fall, supplying you guess the direction correctly. With almost every other investments, you need the price to go up before you make money.
You can bet on a rise or fall at the same time : If the FTSE, for example, is trading at 5551-5552, you can place two table bets, one that it will rise and one that it will fall. These only get triggered when the FTSE actually moves. So if it starts getting larger, your bet that it will rise gets triggered. Similarly if it is catagorized, only your bet that it will fall is triggered. So it can seem that, come rain or shine, you’ll probably win.
Huge leverage : If you bet say £50 a pip (a pip is usually the minimum price movement you can bet on), you can easily win 4 to 5 times your original bet if the price moves in the right direction. On a really good bet, you can win much much more.
You can wait for the breakout : Prices on many shares, currencies, everything and other things people bet on tend to experience periods of stability followed by bursts of movement up or down, what spread-betters call ‘the breakout’. You can place a bet that is only activated when the breakout comes.
Loss limits : You can put conditions in your bet that prevent your losses exceeding your chosen level should your bet happen to be wrong.
You can adjust mid-flight : With most table bets, such as with horse racing or on roulette, once the race has started or the croupier has called ‘no more bets’ you have to wait helplessly for the result to see if you’ve won or not. With spread bets you can choose to close your bet at any time. So if you’re ahead, you can take your earnings; if you’re behind you can either cut your losses or wait in the hope that things changes and you’ll be up again.
Given all these properties of spread bets, it must be pretty easy to brew a fair bit of money without too much effort. Only when.
Industry estimates declare that around 85 % of spread-betters lose most or all of their money and close their accounts within 90 days of starting. There seem to be another eight % or so who make reasonable amounts of money on a regular basis and there are around two % of spread-betters who make fortunes. I’ve been to a few presentations run by spread bets companies and at one of these the salesman let slip that over eighty % of his customers lost money. Even many professionals lose on about six table bets out of every ten. But by controlling their losses and maximising their returns when they win, they can increase their wealth.
Why it can go horribly wrong
There seem to be several reasons why spread bets is so effective at dramatically demolishing most practitioners’ wealth:
The companies want you to lose : When you open a display or real account, you will get several phone calls from extremely friendly and helpful young men and women at the spread-betting company asking if there’s anything they can do to assist you to get going. This is customer service at its very best. Most of the people contacting you will parrot the line that they just want to help and that they’re happy if you’re successful as their company only makes money from the spread. Some will reassure you that they want you to win as the more you win, the more you’re likely to bet and the more the spread-betting company will earn. This may make you feel good, convince you that the company is open, honest, trustworthy and supportive and encourage you to use them for your bets. But it’s also a lie. It’s true that the company might make a lot of its money from the spread. However, with many of your table bets, you’re bets against the company and so they hope you lose, big time. In fact, during the last month I’ve seen several companies change the conditions on their sites to make it more likely that people using them will lose. So, lesson one : spread bets companies are not your friends. The more you lose the more they win. It’s that simple.
It’s difficult to break even : If you bet say £50 a pip and the price does go the way you want, the spread bets company takes the first £50 you win. So the price has to move two pips in the right direction for you to win your £50 back and three pips for you to emerge with £100, doubling your money. In case your price moves three pips in the wrong direction, you lose your original bet plus £50 a pip, giving a total loss of £200, a loss of four times your original bet.
Losses can be massive : With most playing, you can only lose what you put down on a horse, blackjack or roulette. With spread bets you can quickly bid farewell to much more than you guess. I did not remember to put a stop loss on one bet and was able to lose over £800 with just one £50 bet. Because your bet is leveraged, you can make both fabulous gains and excruciatingly painful losses. Too often it’s the latter. Small size of many table bets, often £5 or £10 a pip can lull betters into a false sense of security. It’s only when the losses go five to ten times the original bet that they realise the risk they have taken.
“The spread bets leverage means that you can get rich which is a wonderfully appealing idea, but it also means you can get poor which most people ignore. inches
You can waste thousands on courses and systems : At one free spread-betting class I attended we were more than strongly encouraged to sign up for a two-day weekend course teaching us how to spread bet successfully. This would normally cost (we were told) £6, 995, but there was a special offer for the first five people to sign up of only £1, 997. There are many such courses and also trainers offering to sell you their special spread-betting systems, guides, webinars and all sorts of other advice. With so many supposed experts apparently making a living teaching others how to spread bet, there needs to be a lot of takers. But I’ve found that all you must know and more is available free on the internet. Joined specialist said, ‘Don’t bother wasting your money on ‘Guru’ books written by so-called experts. Those books are crap and not worth the paper they are printed on. Nobody sells a secret trading methodology if they are really successful. The only reason these guys are writing books is really because they didn’t make it as traders’.
It’s the bobbing about that beats you : We often hear on the news that the price of gold has rose up by a few dollars an ounce or the FTSE has lowered by a hundred and twenty points or that the pound has rose up by two cents against the dollar. These reports make price changes on financial instruments sound like smooth movements either up or down. However, the values of shares, stock markets, everything and currencies seldom move in straight lines. They jump about every few seconds. So, if the FTSE is at 5540 and you correctly bet £50 a pip that it will go up to 5545 you might not necessarily win £200. In between going from 5540 to 5545, it might drop down a couple of times to say 5535 or lower. If you have a stop loss on at 5536 or 5535 to avoid losing too much money, your stop loss will trigger and you’ll lose £250 or £300 even if the list did subsequently move in place as you expected. I’ve placed over a hundred table bets to test whether I won when my table bets were right. On about eighty % I lost in spite of being right because the imbalances triggered the stop losses even though the list did actually move from where it was to where I expected it would go. This creates a fairly odd situation where stop losses can unfortunately make you lose even when you should be winning. Yet if you don’t put stop losses on and things go in the wrong direction, your losses can wipe out you.
It attracts losers : At the spread bets seminars I’ve attended, I’ve been shocked by the number of low-paid workers : waiters, porters, kitchen staff, healthcare assistants and impoverished, would-be writers like myself : who decide to have a go at spread bets as they believe that, apart from winning the Lottery, it may be the only realistic way they have of making any money. These people will be bets with their meagre life savings against extremely sophisticated financial services insiders with vast knowledge, many years experience and really deep pockets. It’s not difficult to guess who is going to win.
Sucker or smartie?
Spread bets is a ‘zero sum game’. Unlike adding our money in a bank so it can be loaned to businesses or house-buyers, spread bets doesn’t create wealth. It just redistributes money from the suckers to the smart. When contemplating whether to try your hand at spread bets, you need to work out whether you are likely to be in the 85 % who end up as suckers or the ten % who make money if it is smart. I found it interesting that not just one of the amiable young men and women from spread-betting companies that i mention to truly did any spread bets themselves. By the way, when i did eventually open a live spread bets account and was able to win about £100 a day for ten days, the spread bets company started preventing me leaving losing table bets because they claimed I was “betting unfairly”. However, if you do manage to spread bet successfully, please drop me a message, I’d want to see how to do it.