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16/02/2008 No.1
rendspotting Editor's Choice
Tony Levene
Saturday February 16, 2008
  An each-way price bet

Will the FTSE 100 go up this coming Monday or will it fall? To the casual onlooker, it's like betting that a roulette spin will land on the red or black. But for a growing number of betting fans, that's precisely the attraction, with spread betting on share movements a fast-growing industry.

But be warned, if you get it wrong your losses can be big - and sometimes unlimited.

It's not difficult to see why betting on shares rather than buying them directly can pay off if you think you can spot a short-term move.

Suppose you think ABC Bank shares are due to rise. The price is £5 a share so £5,000 will buy 1,000 shares. But as well as needing to find £5,000, you have buying and selling costs (£30 to £40) plus stamp duty at 0.5% (£25) so the 1,000 shares have to rise by £55 to £65 in total before you start making money (and this ignores the gap between buying and selling prices, which could be anything from £20 to £50). And if you think shares are going to fall, backing your hunch by selling shares then buying them back at a lower price to lock-in the loss is tricky.

Spread betting allows you to stake a small amount such as £10 and wager on shares falling or rising. If you forecast a rise and the shares increase by 5p, you can halt (cash in) the bet and get £50 (5 x £10) without any dealing costs, stamp duty or capital gains tax.

Financial bookmakers such as Cantor Index, City Index, Futures Betting and TradIndex offer a variety of gambles based on spread betting where punters can bet on prices going up or down, useful in uncertain times.

But in spread betting (see panel), the pluses and minuses are open-ended. While profits can be large, losses can be equally enormous - not everyone sets up a "stop-loss" so that losing bets are automatically halted when they hit a financial pain barrier.

One way round this is the little-known but increasingly popular binary bet.

The binary sets gains and losses in stone - you cannot lose more than your original stake or win more than the odds at the outset.

With the binary bet you are either right or wrong. You know what the stake is, you know what the target will be and you either hit it or miss it. It does not matter whether the outcome just reaches (or just fails to reach) the target price or whether you are hugely over or under.

"It's like a fixed-odds bet on football," says Alison Cashmore at City Index. "If you bet on a team to win, it does not matter if it wins 4-3 or romps home by 10 goals. It's the same here. If you bet the Footsie is going to increase by five points over the next hour, you win whether it goes up by your target five or by 50. The binary bet is getting more popular as it becomes better known because it gives you the chance to control the stake. Equally, even if you are horribly wrong, you cannot lose more than your stake."

Like all spread bets, binary bet prices are constantly quoted and you can close a position at any time.

Binary betting is popular with traders who like to take short-term positions by betting on hourly, intraday or weekly markets with a strictly limited risk known at the outset of each trade. It also offers traders access to volatility when the market is not moving much in any defined direction.

How it works
Spread bets:
The FTSE 100 is trading at 5,600. The bookmaker quotes 5,559- 5,601. If you think the index will rise, you would buy at 5,601.
Assuming a £10-per-point bet, the value of your position will be 5,601 x £10 = £56,010.
If you think it will fall, you sell the market so your bet is worked on 5,599 or £55,990.
An hour later, the market falls to 5,575. The bookmaker now quotes 5,574-5,576 as the spread.
You close your bet.
Those who wagered upwards lose. They will have to pay £56,010 minus £55,740, or £270. Those who win collect £55,990 minus £55,760, or £230.
Punters always buy at the higher price of the two and sell at the lower.

Binary bets:
You believe the FTSE 100 will be up at noon. The bookmaker quotes you 35-39. Your make your bet in £1 units.
Your bet costs £39 per unit. This is your set loss if you are wrong and the market is lower.
But if you are right, you collect £61 per unit - that's 100 minus 39.
If you think the market is going down, everything is based on 35 (the lower of the above spread). Your stake per point (and loss if you're wrong) is £65 (100 less 35) and your winnings will be £35 (plus, of course, the return of your stake). In this example, the bookmaker expects the market to fall. Those betting for a rise collect more and risk less than those gambling on the index falling.
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