Many share investors could be forgiven for wanting to shut up shop and go home right now. But not spread betters.
For a 'buy and hold' share investor, these are depressing times. Every time the stock markets show some signs of recovering, the next wave of gloom envelops them. Yesterday, for example the FTSE 100 plunged by its biggest amount in nearly three years as investors panicked about the state of the global economy and the seemingly small impact of the various counter measures (a combination of record low interest rates and liquidity creation) taken so far by central banks.
Worse, there are folk out there enjoying themselves as stock markets fall the spread betters. That's because they can employ a trick that a share investor can't at least not in the UK and not without a lot of help from a broker.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
That trick is shorting. In simple terms, it opens up the option to make money when markets fall.
Take a FTSE 100 bet. You could sell the index at, say, £2 per point when it's quoted by a spread betting broker (for a full list see Compare spread betting accounts) at 5,000 points. If it then drops, say, 200 points, you buy back the bet to close out the trade. Your profit is the points fall in the FTSE of 200 pointsmultiplied by£2 per point. That's £400. All tax-free.
Now there is one twist the FTSE quote will be given as two prices, one to buy and one to sell. But since the gap between the two is so narrow these days often just a point or two that shouldn't worry you. It just means on a quote of, say, 4,999-5,001, you will be selling at 4,999, and when you close out the spread, youwill be quoted more like 4,799-4,801. So you buy back at 4,801. The impact? Your profit is 198 points, all at £2 per point so £396. Still pretty tidy.
Tempted? Here are three tips.
Number one, do lots of practice on your broker's simulated platform. Virtually all of them offer one these days.
Next, keep your bet size low do not dive in at £10 per point on a FTSE 100 bet.
And finally, ask about stop losses to keep losses down should a bet backfire. In the example I gave, had the market risen by 200 points you would have been down £200 (or £198 points allowing for the broker's bid to offer spread).
