Summary: This article looks at spread betting shares in individual companies rather than a stock market index.
As discussed elsewhere on this site, spread betting was invented in the UK by the founder of what is now one of the largest spread betting companies in the world, IG Index. The company was founded to enable financial traders to gamble on markets and as such, spread betting shares was much more important for them to develop at first than sports markets.
That being the case, they enabled trading on all of the FT30 companies in 1982 and on all UK listed companies in 1995. Bearing in mind that it has an Australian subsidiary, their coverage is also unsurprisingly complete.
It ought to go without saying that while spread betting can be notoriously high-risk (you have been warned!) there are significantly different levels of risk attached to different companies.
Using the United Kingdom as an example, there is a significant amount of market risk involved in trading in the largest quoted companies such as BP, Vodafone, Barclays Bank, etc. Such companies prices can move significantly for reasons of fear and greed not even connected to the UK. In other words, if there is a major global market move, these companies will move as well, whether it really relates to them or not!
A great example of this - and one that would be potentially catastrophic for traders on the wrong side of it - was the 2010 Flash Crash in which hundreds of points (900 actually) were lost and then regained by the market in just a few minutes. For unlucky traders, in the wrong index or the wrong company at the wrong time, this would have been bankrupting! That said, there may have been a few on the right side of it as well - a fortunate few that made a fortune!
In contrast, very small companies can have the opposite problem - there are very few trades and the actual share price hardly ever moves! These companies are also, of course, more beholden to management and the owners who may hold a decisive stake in the company. This adds a different level of risk because there may be moves afoot that impact prices to which an outside investor or trader could never know or guess.
These moves might relate to internal politics, positioning relating to controlling stakes or the ego of the founder who remains at the helm. These would seem to be poor reasons to be on the losing side of a trade.
The reality now is that as the major spread betting companies have grown, they offer a bewildering array of choices. For example, while it isn't easy to check this, it seems to your author from the range of markets available that it is possible to trade on every quoted company in Europe.
Since the spread betting companies act as middlemen between traders for the majority of trades, there is ample opportunity to bet on prices falling - selling short - if you feel that way inclined. This is much easier to do via a spread than via the usual borrowing of stock to sell now and repurchasing at a later date to close out the contract. Since the financial crash of 2008, selling short has been temporarily outlawed in a number of countries, however, to the best of our knowledge, since these trades do not actually involve ownership they have been exempt.
In the beginning
There are many people that trade the launch of a company - the IPO. If there seems to be good demand for stock and the general market sentiment is good, this could be a profitable way of spread betting companies. Of course, people do this normally on the stock exchange, but are more likely to simply apply for the shares and then hope to sell at a profit later. This is known as 'stagging' the IPO. By using the same concept through a spread betting firm, traders can used borrowed money more easily to help them juice their returns - or lose money more quickly if things go wrong...
The ability to be short offers the potential to go against company IPOs that seem to be under-subscribed or poorly timed. This is a type of spread betting trading that is not open to normal buyers of shares. If they don't like the look of an offer, they would just leave it alone.
As you might be realising, these differences between buying stocks and spread betting stocks provides a private investor with the ability to access much more sophisticated trading methods. This might not be a good thing, but the adrenaline and risk of Wall Street can be available to anyone.
We would like to make it clear, once again, that spread betting - especially on financial markets - is a very high-risk activity. Potential traders and gamblers are advised to think very carefully about the risks before starting and to gain a solid grounding in financial and market matters.
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