By Sally Nicoll
Author of Bets and the City
Is financial spread betting a valid form of investment? How does it work? And will you make your fortune - or lose your shirt?
According to Napoleon, we're a nation of shopkeepers. But now Tesco's taken over the retail trade, I reckon my dad was more accurate - we're a nation of gamblers.
His attitude towards enjoying a risk, has certainly rubbed off on me. Even as a teenager, I had my nose stuck in Sporting Life, while my classmates studied Jane Eyre, Romeo and Juliet and Cosmopolitan.
My hard work paid off, and my racecourse winnings are adequate compensation for what I lack by way of a degree in English (despite what my mum has to say on the matter).
Anyway, it was perhaps inevitable that I should discover financial spread betting sooner rather than later.
According to London's Cass Business School, over one million Britons will have a spread betting account by 2011. Mine's been open for three years. Have I made money? "Er, no." Or as the optimist in me prefers to respond, "Not yet!"
But plenty of people are making small - and even large - fortunes, playing the stock markets from the comfort of their laptops.
Where have I been going wrong? Frankly, I've made every mistake in the book - and the book's called Bets and the City. I never meant to write it; I was planning to make a part-time million from the markets, while I wrote a novel. Funny how things turn out...
Anyway, before I give you some top tips on how to profit from my misfortunes, let's start at the very beginning. What is financial spread betting?
Profit from markets that fall - and rise
In short, it's a way of making money from price fluctuations on a huge variety of markets, including indices, individual stocks and shares, commodities and currencies. At its most simplistic:
- Suppose the FTSE rises 30 points in a day, and you've bought at £1 a point. You win £30.
- Conversely, if the index drops 30 points, you're £30 down at the end of the day.
- You can also profit from a falling market by selling, rather than buying (FTSE drops those same 30 points and you win £30 because you sold at £1 a point)
Sally advises novice betters to bet only what they can afford to lose
The attractions include tax free profits, no stamp duty and no commission or brokerage fees - all of which help to explain why so many of us, armed only with a broadband connection and a thirst for success, are so keen to give spread betting a whirl.
Seven essential rules for the novice
Before you rush to open an account, here's my advice:
- Never gamble more than you can cheerfully afford to throw in the gutter. If you're playing with money you can't afford to lose, you'll 'play scared' and make emotional decisions... which almost guarantees you'll get wiped out fast.
- Be realistic. Why do you want to spread bet? Many people treat it as a hobby; they love the adrenaline rush of winning (I've made £250 in less than three minutes on several occasions) and are prepared to take their losses on the chin (I've squandered £250 in less than two minutes on several occasions). If you're determined to get rich, the bad news is that it won't be easy, while the good news is that it IS possible. Spread trading, as winners prefer to call it, is a skill that can be learned. Read books. Subscribe to magazines. Take courses. Study share price charts. Practice by doing. Expect to lose before you start to win.
- Start small. The harsh reality is that most beginners lose their money. But you don't have to join them. With most companies, the minimum trade is £1 a point. However, there are others, like the company I use (I confess I chose them originally because they have the best colour scheme) that let beginners try their hand trading 1p a point for the first few weeks. That's an excellent way to decide if you're enjoying yourself, without risking too much.
- Specialise. Get to know a few markets really well, rather than playing the field. Each one tends to have a rhythm of its own. The people who make most money aren't random traders. They might only trade on the price of gold... or a few specific stocks... or exclusively on oil.
- Manage your money. The winners I know never place more than 2% of their bank at risk on any single trade. So with a bank of £2,000, you're prepared for a maximum loss of £40. You set your stop-loss accordingly, and if you're buying the FTSE at 50p, your trade is closed automatically if the index drops 80 points.
- Cut your losses - fast. One guaranteed way to go bust is to watch your trade sink into debt. You think to yourself, "It's only a theoretical loss. And the price is bound to recover." Trust me, most times it doesn't and you only end up losing more.
- Don't panic when you make a profit! There's a saying that beginners run their losses and cut their profits. It's true. A trade works out beautifully... you're making £100... you take the money... if you'd waited another few minutes, you'd have made £150. Then again, there's another saying that no-one goes broke taking a profit. Have fun!
The opinions expressed are Sally's and not the programme's. The guide is not intended to be definitive and should be taken as guidance only.