Main Features of Spread Betting

Why is spread betting different from other "normal" forms of trading? After all isn't that what any trade or investment decision is - speculating on the future price of a financial instrument? Well spread betting has a number of both common characteristics and distinct features to the usual forms of trading. The key characteristics of spread betting are as follows.

Spread betting is tax free
In the UK, where spread betting is predominantly based, all profits generated through spread bet trading are tax free for UK residents. At the time of writing it is also the case with some other countries like Sweden. This means there are no capital or income taxes payable. This can be a double-edged sword as any realised trading losses are not tax deductible. The tax position of trading gains made via spread betting for traders who are not UK residents is likely to be different, so non-UK spread betting traders should contact the tax authorities in their own respective country to clarify how spread betting gains are dealt with for tax purposes.

Spread betting is a margined product
Spread betting is a margined product meaning that a position can be taken with only a fraction of its full value required as the initial deposit. The result of which is that very large profits can be made from a relatively small initial stake. In order to place a trade, an initial deposit called "initial margin requirement" (IMR) needs to be paid. This margin payment is can be as small as 1/10th or even 1/100th of the full value of what is being purchased. Margin trading therefore allows a trader to take a much larger position than would otherwise be taken with the amount of the initial stake, which can result in much greater profits than would otherwise be achievable. Conversely, it could also mean much greater losses than would otherwise be incurred.

Spread betting is (almost) fee free
With spread betting there are no broker commissions or stamp duty (UK) to pay. Although there are no direct fees payable, spread betting companies, or firms, make their profits from the spread offered, which in most cases nowadays is similar to the spread size on the underlying financial product being traded. However, it is worth pointing out that if a spread bet trade is held overnight there is usually a small overnight financing charge payable.

Spread betting is possible on a vast range of financial products
The majority of spread bet trades are taken on equities (stocks), but because the range of financial products that can be traded via spread trading has greatly increased in the last few years the percentage of equity (or stock) spread bets have decreased relative to other spread trades placed. Other popular spread bet trading products now include Forex (both Spot Forex and Forex Futures); global stock indices, eg, DAX 30 index, FTSE100 index, NASDAQ index, the Dow Jones; individual financial stock sectors, eg, Banks, Telecoms, Pharmaceuticals; individual global stocks, eg, individual companies on the S&P500 or FTSE 250; futures and options; commodities and even interest rate futures. It is also possible to spread bet on the value of house prices!

Spread betting with familiar order types
For most investors the types of spread bet orders will be very familiar. Apart from the usual instant execution order, where the trade is executed immediately, other types of orders include OCO (One Cancels the Other) orders, Stop orders (guaranteed and not-guaranteed, and Limit orders.

Spread betting long and short
With spread bet trading it is possible to go "short", or sell an underlying financial instrument as it is to go "long" or buy an underlying instrument (assuming that a regulator does not prevent short trading as actually happened during the recent financial crisis).

Trade on International Financial Markets with No Currency Exchange Risk
When you place a spread bet trade on a financial instrument for example on stock listed on a foreign stock exchange, you will place a bet, or trade, using the base currency of your chosen trading account (£, $, or €) held with your spread betting company. The whole of the trade will be handled or processed in your chosen currency thereby removing any potential currency risk.

FOREX NEWS

Global Recession - Is it really Over?

The Central Bankers of the world met this past weekend in Jackson Hole, Wyoming. Known for hoards of Deer, Elk, hunters and hamburgers, this relatively small frontier town became the center of the financial world for a few days – and will be widely remembered from this day forth as the place in which the global recession was officially declared over.

Just don’t tell those 14% of industrialized workers who are without work, don’t tell those farmers who are selling items at 2/3rds less than what they were last year because of trade restrictions, and don’t tell the Central Bankers themselves, because in the end – the meeting and declaration was more politically motivated than factually motivated.

Jean-Claude Trichet, the EU Central Bank President, gave a speech that can be defined as optimistic, or if you are one of those protagonists, you could have derived a negative message from him.

Ben Bernanke who heads up the US federal reserve was chipper and growth focused in his remarks – notwithstanding the actual numbers, he used words like “I feel” and “in my opinion” to describe the economic recovery – terms usually reserved for politicians and not numbers oriented Central Bankers. Good for him though as President Obama rewarded him with another term as Fed chairman for his efforts.

The Forex marketplace this week has been slow and light, most everyone is off in some vacation spot, perhaps hunting Deer and Elk or eating burgers. Forex traders have not been moving the markets these past few days – and neither has any news for the most part.

The summer is winding down, quarter 4 is around the corner and the world is anxiously awaiting something to happen. In Europe, Germany’s growth and true recession exit is marred by the other EU countries that are still suffering double digit unemployment and negative growth.

In the US everyone, including the politicians and policy makers are on vacation, trying to regroup and figure out how to spend another Trillion Dollars that they don’t have on a healthcare package. And in China, they are selling their Dollars (shhhhhh).

In a world in which the lines between fact and political fiction, it is difficult to pin just where this economy is going. Yes there is some signs that things are getting better, but there also so many signs that there is bad news on the horizon.

In the past 3 months alone, 650 banks have closed in the EU and US – the pains are still there from last year. Unemployment numbers are still rising – and the politicians warn us this is going to happen for a while longer.

But something is happening, we are reaching a critical point in which something will happen. My belief is that it will not be good, but it can turn out to be positive – the haze of summer is upon us and Forex traders and online Forex bloggers like me are looking for a break in the air – a little clarity – and we are not getting it from those who are charged with honesty and truthfulness.

Keep your eyes open – next week will be a good one for numbers. For this week, enjoy the quiet, it is usually like this before the storm.

Read more...

Banks score big on the Economy

I have been so perplexed over the past week, hearing US Federal Reserve Chief Ben Bernanke give a rally cry to the bulls, watching the positive data (or so it was interpreted as) come out and give hope, and seeing the Dollar hold steady.

I really believed that the Dollar would begin a more dramatic cave. But as it seems this was not to be, not just yet. You have bad data still, you have China unloading their Dollars, you have 10% unemployment and the number is growing and yet it was the reports from the banks scoring record profits that kept the Dollar on its feet.

But I have a different outlook, as I have read over the balance sheets over and again of the banks and their multi-Billion Dollar profits.

When an economy is bad, more people live check-to-check, and even tend to extend themselves more than at any time. When an economy is healthy, Banks derive profits from investments and to a lesser degree, fees and customer charges.

Now, in a time where home, car and personal loans have been dry, the fact that the economic growth is negative, and that the questionable securities have not recovered as an investment tool, leaves it hard to believe that banks are able to grow so much last quarter.

Looking at their reports, I can tell you that it is obvious where they are making their money from, and it is not a good sign for the economy.

In the US, when a bank customer goes beyond their account balance, they enter an overdraft territory in which they are charged obscene fees for having the bank cover their charges.

Now, in the past it had been a standard that the customer needed to apply and request this overdraft, and this is not to be mistaken for a typical loan or credit line which are different animals.

The customer would agree that if they charged using their bank car, or wrote a check, and there was no money in the account, they would pay a per-transaction fee and an interest fee calculated and prorated on a month to month basis. The interest is anywhere between 8-18% and the fees can be as high as $10 per transaction.

Now, according to Citigroup, Goldman and Bank of America, it seems as if 60% of their revenue was derived from “customer fees” and increase of 36% from the average between 2002 and 2008. So I dug a little further and here is the fact.

The average bank customer is paying, with fees and interest on overdraft, about 35% per month. Keep in mind that with the high fees, if a customer goes to a pharmacy and charges 1n $8 box of band-aids, he can be charged $18 plus interest on the full $18 as it is calculated at the end of the month.

Think about it, you have no money in your account and you make three charges for $100 in total, with $30 in fees plus interest on the $130 in total, you owe the bank $138. You took $100 and owe more than 1/3rd of that on top of your principle.

What the key is here is banks no longer ask customers if they want overdraft, they automatically approve every customer for it up to a set limit – like $5000. So even if you have no credit, if you have a bank account you do – and this is how the banks are making their money – 60% of it for that matter.

How does this affect the Forex online trader? It is just evidence that some Online Forex blogger has presented to you that the picture is not black and white showing recovery, there are problems and it is growing – growing enough that people en masses are borrowing and the banks are raping them on it, it is making a bad situation worse and the repercussions will come back to haunt everyone involved. Just watch retail sales and consumer prices – these will be telling numbers in the next few weeks.