Financial Spread Betting – Module 1

Trading in Financial Spread Betting – 101.

imgresWelcome to the first module in ‘Trading Financial Spread Betting – 101’. In this module, we will cover the history of financial spread betting, it’s origin and why it has become so popular over the years. I believe it’s important to understand some of the history behind not only spread betting itself, but also, part of the history behind one of the largest spread betting firms out there too – IG Index, who’s founder created financial spread betting back many moons ago.

From my experience of training traders since 2003, I would strongly recommend, regardless of your current experience, that you start from the very beginning. Even if you feel that you know it all and chances are that you probably do, certainly if you’ve traded for a while, although I would be surprised if you knew what was in the much later modules. Moving through the course this way, allows you to get used to how I write and I do write in a very conversational, relaxed way, much as if you were sat in front of me now and I was explaining something to you. Plus, it gives you to refresh your knowledge. In fact, from my own experience of training people over the many years that I’ve been doing this, it’s amazing to find how many people have forgotten some of the basics, or were not aware of certain fundamentals of the markets or so on. If you feel that you are one of these people that do have some experience or a lot of experience, simply do yourself a favour and start from the beginning. It may feel that I am teaching you to ‘suck eggs’ but it will be worth your while.



Basics of Spread Betting

So where did it all begin?

Way, way back in the olden days and I do mean the old days of the 1900’s, all you needed to trade in the stock exchange, was a bit of cash and found yourself the nearest ‘bucket shop’. The term back them meant something quite different that the connotations of what a ‘bucket shop’ is today. These days, we liken bucket shops to the rather shady practice of what is known as ‘pumping and dumping’ stock. Which refers to the practice of inflating the value of a stock, through manipulating news, creating hype, calling up people suggesting inside info and so on. All very dodgy and somewhat illegal. The aim of course to raise the value of a stock, or the expectation of the value of a stock to increase, to which people will usually buy into the stock more and more.  Not realizing that those that are ‘pumping’ the stock, have a lot of this stock in hand, wanting it to increase enough in value, to then sell at a healthy profit as the excitement for that stock increases – otherwise known as ‘dumping’ the stock. There has been over the years a good amount of this going on. Some newspapers were fined for their writers promoting a stock, just after they had purchased it and then selling the same stock later with a huge profit, after all their readers had purchased the same stock, inflating its value and making a nice hefty profit for the writer. Needless to say, this was spotted quite quickly and those that were found doing this were reprimanded, in a very harsh hand spanking way.

Bucket Shops back then were where many of the key brokerages originated. Essentially, you would walk into one would look much like a reduced small stock exchange, adorned with blackboards with stock symbols and young boys reading ticker tape readouts of the latest prices and updating the prices as and when on the blackboard. Trading back then was basic; you walked in with a load of cash, deposited it with the shop manager, trade on the price movements of the stock in the NYSE and walk out at the end of the day, either with profit or with empty pockets. Amazingly, what you could do then, which is incredibly popular now, was to ‘bet’ or trade on the expectation of a falling market, ‘shorting the market’.  What is more interesting from all this, is that at the end of the day, you walked away with profit or loss (or the same deposit), but not once at any time did you own any stock, you simply essentially ‘gambled’ on the stock movement.

One thing that I do find somewhat strange, is especially considering this is very much like what Financial Spread Betting is today, aside from some important subtlies. When you think about that this came about in the 1900’s in the US, it would be safe to assume that it’s contemporary version, financial spread betting, would be legal and popular in the US. Unfortunately this is not the case. Despite there being constant calls to make financial spread betting legal in the US, both from the likes of IG Index and of course those wishing to trade.

That then, back in the murky days of trading history, was the start of what evolved much, much later, thankfully to one man, into financial spread betting, that we know and love today.

The year is 1974

I was the grand old age of 5 years old. The year when Nixon was pardoned after he resigned after the Watergate scandal, Brisbane in Australia, it’s river flooded much of the city and destroying 8,500 homes, fuel goes through the roof because of global inflation, Sears Tower in Chicago becomes the Worlds tallest building, Turkey invades Cyprus, British Coal Miners join other striking unions for higher wages and drag the UK into a 3 day week, electricity blackouts and almost the country to it’s knees and one unemployed stock broker called Stuart Wheeler, who founded the IG Group thought about a means of allowing traders to speculate on the price of gold – as it was illegal to actually purchase gold as a means of speculation back in 1974.

Gold back then was priced through a select meeting held at N.M Rothschild’s the merchant bankers to agree on the price to ‘fix’ for gold bullion – the price that it would be available to be purchased by the companies that were allowed to purchase gold bullion. Once agreed and announced to the markets, the price that this select few would agree gold would be ‘fixed’ would remain till the next meeting, when the price was ‘fixed’ once again. This is the reason back then that gold bullion wasn’t used or legal to speculate with, as the price was fixed by a select few, who could make a lot of money in doing so. Obviously since then things have changed dramatically.

It was during this time that Stuart Wheeler, to a select few people, offered a bet, a gamble, to his friends, based on the ‘fixed’ price of gold – this gamble would be based on the ‘buy’ or ‘sell’ of the previous ‘fixed’ price, as opposed to the new ‘fixed’ price. Those trading would either look for a higher or lower price and Stuart Wheeler pocketed any profit that was made from those betting with him – essentially he became a ‘bookie’ on the price of gold. He created a company initially called ‘Investors Gold Index’, but due to pressures from the Bank of England, stating that the name was misleading, Stuart Wheeler, changed the name of the company to ‘IG Index’.

Over the years, IG Index grew quickly, as this new form of speculation took off. Over time, more markets were added in which you could ‘buy’ or ‘sell’ a bet against IG Index.

Yuppies, Shoulder Pads & Porsches.

The hedonistic period of the wild stockbrokers, wearing Armani suits, wide shoulder pads, driving bright red Porsche cars and spending thousands on nights out. The Term of Yuppie came about, associated mostly with anyone that was young and professional – ‘young urban professional’. However, it was stockbrokers that took being known as a ‘yuppie’ to a all new level of public loathing. The music was all ‘Dire Straights’, the TV was clad with ‘Live Aid’ and the UK and global economy was booming.  These were the days, where as long as you were willing, you could make a killing. Maggie Thatcher at the time, started selling off public utilities to the public (which was odd was we owned them already); dawn of the public listings of British Gas ‘Tell Sid’  campaign on TV and British Telecom, raised billions of much needed money to help transform these old struggling previously state owned utility providers. You guessed, it, it’s the 80’s.

The success of Stuart Wheelers company IG Index, created a lot of interest from competing brokers, who could see this as a means of making money from traders wanting to speculate on the market. During the 1980’s, two other key financial spread betting bookmakers appeared; CMC Markets and City Index. However, those trading spreads still at this time, were a very select few, despite it’s amazing growth. 99% of those trading financial spread bets at the time, were the professional traders, who were already in the position to understand the underlying aspects of which the spread bet was made; gold prices, FT30 (Financial Times top 30 UK based companies) and the FTSE100. All of these and more, required a good understanding to have any chance of being able to judge whether the market would go up or down.  This was simply the limitation with technology at the time. It simply was not possible to offer ‘spreads’ (the difference between the ‘buy’ and ‘sell’ price, where the bookmaker makes the profit) on more than a handful of markets – the technology wasn’t there to keep track on so many. A trader would call the bookmaker; they will be given a price and need to make a decision based on that and their knowledge of the market, that was it. In the 80’s there simply wasn’t any other method to gauge a trade. To track it, they would have to call in on the telephone, to see where their trades were in or out of profit.

Oasis, Nintendo & something called ‘The Internet’.

This was the decade where ‘Brit Pop’ exploded onto the scene. Oasis were the bad boys of pop/rock culture, house music spawned the rise of illegal rave parties where ever there was an empty field, ‘E’s were being handed out like ‘Smarties’ as the drug of choice, ‘Club 18 to 30’ holidays exploded in places such as Greece, Spain and Cyprus, a sheep called ‘Dolly’ discovered she had a genetic perfect twin, but from a different mother and the World Wide Web started to get some interest among some geeks, that became the biggest change to business, culture and modern life as we would know it. Yes, it’s the 1990’s.

Two things fueled the rise of financial spread betting during this period; the rise of Personal Computers and the Internet, but not in ways that you would perhaps first expect. The rise of PC’s and the eventual computerization of the stock exchanges, allowed for the growing list of financial spread betting companies to offer more spreads on a wider array of markets and do so more accurately. Eventually, allowing the book makers to provide platforms for traders to keep track of their trades and into 2000’s platforms as we see them today. In the 90’s it was still telephone trading, but because of the power of the Internet and the speed of communication and modern technology at the time. Allowed bookmakers to offer a wider and faster service of spread bets to their clients. Who, even in the early to mid 90’s were still predominantly professional traders, but this soon turned around.

The Internet as we see it today was a very different animal back in the 90’s. I should know, I was responsible at the time for being the project manager for various Internet based companies. I know, from first hand experience, the crazy amount of money that was being thrown around and the ridiculous ideas that were receiving investment and then going IPO. It was during this time, that I personally started to take an interest in trading and realized, early on, that the actual value of a company, where it was being traded at, had little to no relation to it’s physical value as a company, but more to what traders thought it should be traded at – based purely on ‘fear’ and ‘greed’.

The dawn of the age of the ‘dot com’ bubble, created a means of huge overly valued companies, going IPO and making millions from silly ideas. At the time, those wanting to trade, were not willing to actually purchase stock in these companies and realized, that in fact, the financial spread betting companies, were offering the ability to ‘trade’ the same, without all the headache of tied up capital in shares and the ability to close out of a poor trade quickly, in these and other companies. This increased as more and more people, normal average ‘retail’ traders took note.

Plus, the key advantage, was when these same shares would plummet, instead of having to worry about selling stock you owned, you could with a spread betting company, simply ‘short’ the market. In fact, during the bear market after the ‘dot com’ bubble finally burst, financial spread betting came into it’s own and public interest soared, as they could see how possible it was to profit from the falling markets. In 2003, I created a training company, that educated private investors in technical analysis, in how to trade from falling markets.

Today, tomorrow and the year after.

Financial spreads have come a long way and during that time, in fact during the last 10 years, I have seen some incredible changes in the industry. With there being many spread betting companies to choose from. To spreads being as tight as ever and the online tools and services offered by financial spread betting companies on a level to that of professional traders. The aspects and markets to which you can now trade ‘bet’ on are extraordinary.

During this same time, we have seen banks come and go, the economy collapse and the World slip into a recession (it really was a depression) never seen since 1929. Bankers and banks in general, traders and anyone making money from the financial markets are seen by the press and the general public, to blame for this global melt down and in some respects they are right. Derivative products expanded and banks and traders became greedy, gambling, on anything. Products were created in ridiculously geared ways, that enabled traders and banks to make more money. All the time, just looking at the ways of making money, but not looking at the long term view, which resulted in the collapse that happened and most banks never thought to care to look what would happen if things did go belly up.

Trading during this time became quiet. The financial spread betting market, much like other ‘retail’ trader markets slowed right down. Interest in trading went almost over night. It was seen as too risky and almost a taboo by many.

As I write this in December 2014, recently we have seen traders in the news for gambling in the markets, financial spread betting was used to help the trader ‘hedge’ his losses, but failed. Reading at the ‘Times’ online, people were mostly due to ignorance, stating that financial spread betting should be illegal. The Financial Services Authority, have over recent years introduced more strict policy and compliance with financial spread betting. In fact, during this last year alone, financial spread betting has had a bit of a bashing, with WorldSpreads PLC going under, after it was alleged that the company was using client money to cover it’s marketing and running costs.

Thankfully, I see this year and the past few years a rinsing of the financial spread betting market. It has changed but for the better and always with the trader in mind, you. Granted, it maybe harder now to open a trading account, than say it was a few years ago. Personally, I don’t think there could ever be a better time to begin financial spread betting, considering the tools, the training, the speed, the ability to trade from where ever you are in the World, just by looking at your tablet computer or on an ‘App’ on your phone. The rise of the amount of free information available to you online, has never been seen before in our lifetimes. Plus, of course the ability to trade any market, up or down, quickly and providing of course you learn from opening a ‘demo account’, learn ‘technical analysis’, the markets and more from somewhere or someone – this website for instance, then I believe, now is a wonderful time to get either into financial spread betting if you’ve never tried it before, or back into it, if you left it after getting scared over the last few years.

Understanding Financial Spread Betting

Financial spread betting is an alternative trading style that allows investors to open a position without actually owning the underlying asset. The trader opens the position based on the expected price movement of a share, index, commodity, currency or bond.

In the UK it is classed as a form of derivative gambling, despite the fact that it differs significantly from traditional gambling. For one, when placing a fixed odds bet, the most that can be lost is the equivalent of the bet placed but with spread betting the losses have no limit.

Spread betting is not a new trading method as it was first developed in the 1970s by Stuart Wheeler, an investment banker. However, this trading style only gained popularity towards the late 1990s mainly due to the internet as it offered anyone easy access to market information that was previously only available to a closed circle of high volume traders and institutions.

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