Spread Betting Guide

Contents
Page

1. History of Spread Betting 2. 10 Benefits of Spread Betting 3. How to Spread Bet 5-Step Guide 4. How to Manage Risks 5. Top 10 Spread Betting Tips

3 5 7 9 11

Financial spread betting has been around in the UK for just under 40 years, with the product initially popular amongst just a select set of high net worth investors in the City of London. With time, awareness grew around London and into the broader area of South East England as more and more traders realised its many advantages. Today it is one of the most popular products used by retail investors across the UK to speculate on the financial markets. With spread betting, it is possible to speculate on rising as well as falling markets, enabling you to profit from volatile market conditions. Spread betting offers numerous other advantages including taxfree profits* and high leverage, giving it a distinct edge over other conventional forms of shares trading.

The History of Spread Betting

mobile trading is so crucial in todays volatile markets, meaning that you can keep on top of your trades at any time of the day, regardless of where you are.

The internet changed the spread betting world forever

During the first couple of decades of its infancy, spread betting remained the privy of traders in and around the City of London. The rise of the internet in the dot com boom of the late 1990s and early 2000, however, changed the previous status quo forever. The introduction of the internet triggered a dramatic upsurge in the awareness and therefore popularity of spread betting throughout the UK, making it one of the most commonly used products for market speculation by retail traders today. For the first time, mass retail traders were able to gain instant market access and speculate on rising as well as falling prices for profit, irrespective of their profession or where they were based, just like professional traders at larger financial institutions. The internet has also made it possible for spread betting providers to broaden the scope of their marketing activities. Leading spread betting providers such as City Index regularly offer free education programmes, enabling aspiring traders to hone their spread betting skills. Dot-com boom of late1990s

This stark rise in spread bettings popularity is amply apparent in the changing profile of spread bettors in the UK over the decades. Before 2000, the average spread bettor was male, 48 years old and typically worked in the financial markets either directly or indirectly. Today the arage spread bettor, although still male and likely to have some experience of shares trading, is younger at around 40 years of age and likely to have an occupation outside of financial trading. He no longer works primarily in the City of London and could be anything from a city worker to dentist, doctor, manager to even teacher, such is the scope of interest in the product today.

Average spread bettor age

48 40

2000

2011

The role of the media

In the last five years, the media has played a significant part in the rise of spread betting, making it a pliable option for aspiring traders. The credit crunch of 2008 and the downfall of Lehman Brothers launched big daily share price movements onto the front pages of most newspapers, increasing the knowledge and awareness of the impact and significance of these price moves. This, coupled with education campaigns by leading spread betting providers such as City Index, enabled retail traders to realise the benefits of spread betting, helping them to utilise online trading platforms to speculate and profit from volatile market price moves. The fact that traders can use spread betting to short sell share prices (profit from falling prices), means that there is now a much quicker connection between a sharp loss in ones portfolio to the realisation that one can hedge that loss in value through a spread bet.

The changing face of technology

Internet Trading Platforms (ITPs), such as the one offered by City Index, have over the years also played a significant role in helping retail investors to take their trading to the next level and become their own fund managers. With the introduction of ITPs, investors were, for the first time, able to manage a portfolio of positions, create and amend orders, undertake market research and analyse their performance all from one platform. The last decade has seen spread betting providers invest millions in developing platform technology to the point where live streaming news, innovative and customisable charting packages are today considered standard offerings. As a result, retail investors are now able to exercise greater control over their investments, reacting and trading the markets from their homes in much the same way as professional traders at financial institutions. Continued investment into the development of innovative and intuitive online trading platforms also means that trading for retail investors has become easy, secure and instantly accessible.

The advent of mobile trading

In much a similar way as the internet and Internet Trading Platforms changed the world of spread betting forever, the rise of mobile trading has also triggered a wave of new product innovation within the industry over the last three years, to the huge benefit of retail spread bettors. City Index was the first spread betting firm to create an innovative live trading app for iPhone in 2009 and Android mobiles in 2010. Mobile trading has allowed spread bettors to trade wherever they are and whenever they want, taking supreme control over their trades in much the same way as professional traders for large investment banks. When markets are volatile and prices moving fast, being able to get in and out of a position quickly can be the difference between a profitable trade and a losing trade and mobile trading gives spread bettors every opportunity to profit from fast moving markets at the touch of a button on their phone.

Spread betting is a tax-efficient* way of trading the price movements of thousands of financial markets globally. You can go long or short on market prices, making it possible to profit even when prices are on the decline. Spread betting offers many distinct benefits as compared to other forms of financial trading. These include the following.

10 Benefits of Spread Betting

As all spread bets have a fixed expiry, it is classified as betting, potentially saving you as much as 28% of your net profits which would normally be owed as CGT if you had bought shares directly

1. Tax efficient trading:

Under current UK legislation any capital gains are tax free, giving you an immediate double digit percentage saving on your profits. Spread betting doesnt incur any stamp duty costs or commissions either, meaning that you keep all of your profits made in trading whilst the main cost of trading is factored into the spread.

4. Range of Markets:
With your spread betting account, you can gain access to over 12,000 markets from all over the world including shares, indices, commodities, currencies and bonds. This means that you can gain exposure to a wide range of new markets you may not have had access to before.

2. Ability to make money in falling markets:

Spread betting gives you the opportunity to profit from both rising and falling markets as you only trade on the price movement and do not own the underlying instrument itself. You can profit from falling markets by going short or selling, meaning that your profits will rise in line with any fall in the price. This gives spread bettors a great deal of trading flexibility, allowing them to profit from any price movement, be it up or down.

5. Account Accessibility:
You can access your account from wherever you are, whenever you want via our internet trading platform (ITP), over the phone or via your mobile device. We have a range of platforms custom built to suit the mobile device you have, including a free and multiple award-winning trading app called City Trading, which is available for download on your iPhone, Android or BlackBerry mobile.

3. Leveraged trading:
All spread bets are leveraged, meaning that you are only required to initially deposit a small fraction of the total exposure to place a trade (also known as margin trading). Deposit rates start from as low as 1% so for example, a buy trade with an exposure of 3,000 would only require an initial deposit of 30 at a 1% margin rate. This means that you can magnify your returns on investment when prices trade in your favour. However, leverage can be a double edged sword and losses are magnified in exactly the same way.

6. Client support and 24-hour dealing:

Our prices and client support follow the sun around the world, much like the financial markets. You can trade from Sunday evening when the markets in the Asia Pacific region open, through to the New York close at 9pm Friday evening, although currencies and futures are tradable until 9.15pm.

1 Spread betting is exempt from UK stamp duty and UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances.

7. Different Order types:

We offer numerous order types to help you to manage your trades more efficiently and around the clock, even when you are away from your laptop or mobile. Our range of order types have been created to help you to lock in profits when prices reach your profit target whilst at the same time you can curb losses from escalating past your maximum loss levels, all automatically, without needing to be in front of your trading screen.

5375 5350 5325 5300 5275 5250 5225

10. Innovative technology:

We spend a huge amount of resources each year in developing new innovative technology to help our clients to trade better. This means that spread bettors get instant and FREE access to innovative trading tools such as interactive charting technology, news and market analysis from our team of experts.

8. Out-of-hours trading:
On select markets such as indices and commodities, we offer out-of-hours trading, meaning that you can take a position in these markets even when the underlying market is closed, making spread betting even more flexible than regular trading. For example, we run our UK 100 (FTSE 100) market 24 hours a day, from Sunday night until Friday evening even though the actual FTSE 100 is only open each weekday from 8am until 4.30pm. So whilst others may have to wait until 8am each weekday morning for the FTSE 100 to open, you can trade it whenever you want.

9. Trade Speed:
We pride ourselves on our speed of execution, with most online spread bets transacted in less than a second. This is very important, particularly when markets are highly volatile and prices are moving quickly. Whats more, profits and losses are instantly realised into your account balance at the end of the trade so there is no waiting time for your profits to settle into your account. This means that you can reinvest your profits straight away or withdraw them from your account at your convenience.

5-step guide
Placing a spread bet is a relatively simple and easy process. The following chapter shows our 5-step guide on how you can place your first few spread bets with City Index.

How to Spread Bet

Only trade a market you know. If you didnt know that higher oil prices escalate airline costs and could pressurize the share prices of airline stocks, you may be fighting a losing battle when buying into EasyJet shares for example.

1. Pick a market and take a view

City Index offers over 12,000 spread betting markets including shares, indices and commodities, so picking a market thats right for you can be a crucial decision. It is important that you pick a market you know. We recommend that you take your time to understand the amount of price volatility associated with that market, before you start trading, as this will help you to attain a better understanding of the likely result of any trade on that market. For example, if you want to trade Company ABC, and its share price moves 2p on average each day, then you can assume there is likely to be a minimum 2p risk for each day your trade remains open. It also helps to learn about factors that are likely to influence prices for the intended lifetime of your trade, such as company earnings announcements or economic data. For example, rising oil costs often negatively impact the share price of airlines (as rising fuel costs would cause profits to fall, thus pulling down the airlines share price) and so on. Once you have picked your market and taken a view, its now time to place your trade.

2. Choose your trade and stake size

Once you have picked a market that you are comfortable with, you need to request a price. Each market details bid (sell) and offer (buy) prices, with the difference between the two known as the spread. For this chapter, we will use the FTSE daily rolling spread as our trade example. If you believed that prices would rise, youd buy or go long on the buy price of 5301 and your profits would rise in line with any increase on that price. If you believed that prices would fall, you would sell or go short on the sell price, and your profits would rise in line with any fall in price. Your stake size is the amount of money you want to risk per point movement in price. So lets say you decide that the FTSE 100 will rise in value and BUY 5 per point at the buy price of 5301. This means that for every point the FTSE moves higher, you will make 5. Consequently, for each point the FTSE moves below 5301, you lose 5.

Sell 5300 5301 Buy

Sell go short if you think the market will fall. Buy go long if you think the market will rise.

FTSE daily rolling example

If you believed that prices would rise, youd buy or go long on the buy price of 5301 and your profits would rise in line with any increase on that price. If you believed that prices would fall, you would sell or go short on the sell price, and your profits would rise in line with any fall in price. Your stake size is the amount of money you want to risk per point movement in price.

So lets say you decide that the FTSE 100 will rise in value and BUY 5 per point at the buy price of 5301. This means that for every point the FTSE moves higher, you will make 5. Consequently, for each point the FTSE moves below 5301, you lose 5.

fig. 1) Open Trade Chart

fig. 2) Deal Ticket

3. Financial health check

Spread betting is a leveraged product. This means that you are only required to initially deposit a small fraction of the total exposure to place a trade. It is important therefore that you make sure you have enough funds to place the trade. For the FTSE 100 Daily Rolling spread bet, we offer a margin rate of 60 x stake. This means that you need to have a minimum of 300 (60 x 5 = 300) in your spread betting account in order to place the trade. It is also equally important that you have enough funds in your account to help cover any likely price moves for the duration of your trade. For example, if the FTSE 100 moves an average 50 points a day and you are likely to keep this trade open for two days, it could be wise to have an additional 500 at least (50 x 2 x 5) in your account to help cover any potential negative price swings against you.

4. Add Closing Orders

You can use the order system to both manage your trades and minimise your risk, even when you are not in front of your trading screen. An order is an instruction to trade at a point in the future when prices reach a specific level predetermined by you. There are two types of closing orders Stop Loss and Limit Order. Stop loss and Limit Orders are designed to maximise your ability to manage your trades, even when you are not in front of your trading screen. You can utilise closing orders to help ensure that you lock in your profits and minimise your risk when your respective profit and risk targets are reached.

A Stop Loss Order is an instruction to close out a trade at a price worse than the current market level and, as the name suggests, is used to help minimise losses. There are two types of Stop Loss ordersstandard and guaranteed. A standard stop loss order, once triggered, closes the trade at the best available price. There is a small risk therefore that the closing price could be different from the order level if market prices gap. A guaranteed stop loss however, to which a small fee is charged, guarantees to close your trade at the stop loss level you have determined, regardless of any market gapping.
fig 1) Stop Loss Chart

In our FTSE Daily Rolling trade example, we placed a BUY 5 per point trade at 5301. If we place a guaranteed stop loss order at the 5251 level, this means that our trade will automatically close should the FTSE fall to 5251, capping any losses at 250 (5301-5251 x 5). To guarantee the stop loss level on this FTSE trade, there is a charge of 15 (3 x stake size i.e. 5). Tip: The only way to 100% limit your spread betting risk is to use a guaranteed stop loss.

fig 1) Stop Loss Deal Ticket

A Limit Order is an instruction to close out a trade at a price that is better than the current market level and is used to help lock in profit targets. In this FTSE Daily Rolling example, if we place a Limit Order to lock in profits at 5351, this will mean that should the FTSE rally as we expect, as soon as prices hit the 5351 level, which would mean a profit of 250 (5351-5301 x 5), your trade will automatically close and the 250 profit will immediately be transferred into your cash balance.
fig 3) Limit Order Deal Ticket fig 2) Limit Order Chart

5. Closing the Trade

Having placed your trade and closing orders, your open profit and loss will now fluctuate in tandem with each move in the market price. When you are ready to close your trade, you simply need to do the opposite to opening a trade. So say you placed a BUY 5 FTSE Rolling trade to open. You now need to SELL 5 FTSE Rolling at the current sell price to close the trade. By closing the trade, your net open profit and loss will be realised and immediately reflected in your account cash balance. Using the same trade example, lets say that the FTSE 100 had rallied as you had expected, to trade at 5340. Whilst the rally was not enough to hit your Limit Order profit target of 5351, you decided that it was enough to net you a tidy profit of 195 (5340-5301 x 5). By placing a new SELL 5 FTSE Rolling trade at 5340, your FTSE trade would fully close and your open profit of 195 would immediately be reflected in your cash balance.
fig 1) Closing Deal Ticket Profit made - 195

As spread betting is a leveraged product, it involves a higher degree of trading risk as compared to other regular forms of trading. This is due to the fact that whilst you are only required to deposit a small margin to trade, your true exposure remains the full value of your trade. This essentially means that you may lose more than the amount of funds that you may hold in your account

How to Manage Risks

the only way to 100% limit your spread betting risk is to use a guaranteed stop loss

Risk example: Company ABC trade

If you were to place a spread bet on Company ABC with a total exposure of 5,000 and the trade carries an initial margin rate of 10%, you need to deposit an initial 500 into your account in order to place the trade. However, the full exposure of your spread bet remains the value of the trade i.e. 5,000. Should your position go against you, you run the risk of losing more than the initial 500 deposited and may therefore have to deposit additional funds at short notice to maintain your position.

There are two types of stop losses: standard and guaranteed

Standard stop loss

A standard stop loss is free of charge and available on all markets. Once triggered, it will close out your trade at the best price available in the market. Should market prices gap (i.e. slippage), where prices literally gap from one price to the next without ever trading at the levels in between, this could mean that your trade is closed out at a price worse to that of your requested stop loss level. This means that a standard stop loss does not provide 100% risk management protection.

How can one manage risks?

The best way to manage risk is by attaching stop loss orders to your trades. A stop loss is an order to automatically close a position when it gets to a specific loss level dictated by you. For example, if you have a buy position on Company ABC at 500p and want to ensure that if the position goes against you, your losses are curbed should prices reach 450p, you can add a stop loss to 450p. This would mean that if the, your position would be automatically closed at the best available price to help prevent you from incurring further losses should prices deteriorate further.

Company ABC Rolling 550 525 500 475 450 425

Guaranteed stop loss

A guaranteed stop loss guarantees to close out your trade at the level specified regardless of market gapping. Therefore, guaranteed stop losses are the most efficient way of protecting your trading risk 100% of the time. Please be aware however, that for guaranteed stop losses there is a small charge incurred for the added risk protection. We do not offer guaranteed stop losses on all our markets.

Stop Loss

at 450

To guarantee or not to guarantee, that is the question This is a common question amongst spread bettors. For some trades in markets where gapping is uncommon or for trades that are expected to last mere minutes, there may be less of a motivation to use guaranteed orders than standard stop losses. That said, the best and only way to 100% protect your trading risk is to use a guaranteed stop loss. The charge for doing so is small and it gives you peace of mind in the knowledge that if prices do gap, your losses are stopped at a specific level.

1. Know your market

Spread betting offers over 12,000 markets to trade, so it is important that you choose one that you really understand and are comfortable with. A successful trader has the ability to identify and understand events influencing market movements, such as economic data, and their likely impact on the price actions of the instrument he wishes to trade. As a spread bettor, you need to take a clear view on the direction in which you think prices will move in the future and it helps to research your trades using the news and charting tools available through the secure ITP area of the City Index website.

Top 10 Spread Betting Tips

2. Never overtrade
We always recommend that no trader should ever trade beyond his or her financial means. This means that you should never use up your entire cash balance as margin for a single opening trade, however promising it may seem at the time you open your trade. Market volatility is unpredictable and could easily leave you with little surplus in your account to allow for price fluctuations, if the market moves against you. Always have extra margin to cover your position should prices move against you.

3. Set realistic trading targets and stick to them

When trading in general, it pays to safeguard yourself against emotions such as greed, fear and hope. As with other forms of trading, it is easy to get carried away and make impulsive spread betting decisions. It therefore helps to outline a trading plan, which should provide a general set of rules that you can refer to when making important spread betting decisions. A trading plan need not be complicated and could specify things such as: Profit goals (per day, month, year) Maximum losses you are prepared to take Size of the trade at any one time Entry/exit point Without rules, it is easy to give in to your impulses, making irrational spread betting decisions that you may later come to regret. Of course, as you become more confident, these rules can be changed and adapted to any new strategy you may wish to adopt.

4. Cut your losses

In a losing situation it is easy to let losses accumulate in the hope that prices will turn around. By getting out of loss making positions early you will be able to cut your losses before they become too large and this is where Rule 3 will come in handy.

5. Use stop losses to manage your risk

You can place closing orders (stop losses) on trades both online, via your mobile and over the telephone to help minimise your losses. Remember that a standard stop loss does not protect you if prices gap so always consider a guaranteed stop loss for added protection. There is a small additional charge for a guaranteed stop loss and these are not available on all our markets.

6. Expect losses
Even the best traders get it wrong so netting a loss on your trade doesnt make you a bad trader. It is important, however, to analyse your losing trades and learn from your mistakes. Dont get emotionally attached to your trades.

Trading is a skill that requires practice. It is important to learn from every trading experience, regardless of whether they netted you a profit or loss.

Some traders even believe that the best lessons they have ever learnt come from losing trades as opposed to winning ones.

9. Dont trade on rumours

Rumours in the market place are a regular occurrence and, just like Chinese whispers, can quickly deviate from reality. By undertaking proper and timely research before placing your trades, you should feel much more confident in your positions. Always form your own opinion about every trade so that when you are ready to trade, you are confident that you have taken a valued and considered view.

7. Be disciplined
Some traders can be so emotionally involved in a position that they may make impulse trades, whereby they either get in or out of a position prematurely. So it is vital that you stick to your trading plan and not let your emotions take over. Consider the appropriate levels to take profit and losses and stick with it.

10. Keep informed and up-to-date

Make use of all the resources available to you to maximise your understanding of the markets. Your trades will move in tandem with the live market and by being in a position to react to market news, you will be in a much better position to open new trades or exit positions quicker than if you were not keeping up to date with market events. The City Index Internet Trading Platform is constantly updated to give you the latest news and information from well respected news providers and market analysts.

8. Dont put all your eggs in one basket

It is always advisable to trade a variety of markets to spread your risk. If you place a large trade in one market, your trading account will live or die by that one market. By spreading your trades across a variety of different markets or sectors, you are diversifying your risk.