Spread betting is the term used to describe investors who trade in contracts for difference [CFD]. A CFD is a contract between two parties, a “buyer” and a “seller”, stipulating that the seller will pay the buyer the difference between the current value of an asset and its value at contract time (if the difference is negative, then the buyer pays the seller instead). CFDs provide investors with the all the benefits and risks of owning a security without actually owning it.
CFDs are usually leveraged trades, so it is possible to make big bets with a relatively small amount of money in your trading account. Trading firms typically offer leverage in excess of 200:1 with some offering up to 500:1. This means if you make the right call you can win big but if you make a bad call you can end up owing much more than what you have in your account.
The Financial Regulator in the UK – the Financial Conduct Authority (FCA) last week clamped down on this type of trading.
The Regulator has become concerned about the level of losses being experienced by investors. Based on research taken from a sample of industry data, they conclude that 82% of all trades made in the UK resulted in a loss to the investor. They further calculate that the average result per client amounts to a loss of £2,200.
The FCA has raised ‘significant conduct concerns’ about the amount of leverage being offered which is says ‘can lead to rapid, large and unexpected losses to investors’. They are concerned that many retail investors simply do not understand the risks they are running and that it will seek to impose stronger risk warnings and force trading firms to provide greater disclosure of profit-loss ratios.
Where does investing end and gambling begin? Most people will not borrow money to back a horse but many will borrow significant sums to purchase a home. Investment is never risk free; it is about asking questions, assessing risk and making decisions with advice. Anything else is a gamble.