Take a gamble on spreadbetting

22 September 2009

There aren't many advantages to owning a physical share compared with the exposure you can obtain through spreadbetting. The big argument in favour of owning the actual share is to receive the dividend, but you have to be holding shares on the relevant date to receive that.

Otherwise, you will probably care little about voting rights attached to shares, for example, unless there are exceptional circumstances such as merger and acquisition activity or an imminent vote on an issue that you feel strongly about.
Most of the advantages of owning physical shares are dwarfed by the those that spreadbetting has over traditional stock trading in that all your deals are free from stamp duty and liability to pay capital gains tax.

The cost of financing long-term spreadbetting positions has also diminished in recent years in line with falling interest rates, so many spreadbetters are now happy to hold their positions for up to six months.

Access all markets

One activity where spreadbetting can really come into its own is in international equity markets, because a single log-in allows seamless access to multiple markets and all trading can be held in the one account, avoiding any duplication of costs.
In contrast, some traditional stockbrokers make you use different platforms, while opening a brokerage account as a non-resident in certain countries such as Canada or Hong Kong can be difficult or impossible.

Traditional brokers generally charge a premium for deals in international shares. For example, execution-only website iWeb charges £15 for international shares compared with £10 for UK shares, while NatWest charges £20 for international shares compared with £15 for domestic ones.
The depth of financial markets offered by spreadbetting firms has burgeoned in recent years, and some offer particularly wide coverage of overseas shares. City Index, for example, offers access to more than 12,000 UK, European, US and Asian shares.

IG Index quotes on any company in the US with a market capitalisation of $500 million-plus, and its spreads do not widen massively for smaller stocks. Black & Decker, for instance, is capitalised at $1 billion and is quoted on a spread of just 5%.

One of the difficulties of investing in foreign shares in the traditional way is that you have to buy them in the indigenous currency, so will incur the risk of that currency moving against you. For instance, if you make a trade on Wall Street, this will be in US dollars and if the Dow rises by 5% but the GBP/USD rate rises by 5% in the same time frame, your profit will be negated.
In contrast, spreadbetting firms offer a choice of currencies for trading international stocks, generally either in sterling, dollars or euros, although some, such as MF Global Spreads, offer additional major currencies such as the yen or the Swiss franc. This differs from contacts for difference (CFDs) where trading always takes place in the base currency of the market traded.

One currency can track all

A single currency makes it easier to track your investments points out Manus Cranny, senior market commentator at MF Global Spreads. If a share rises 15 points on the day, for example, it is far easier to estimate your profit by calculating that you have made a £10 per point increase than it is to calculate the number of shares multiplied by 15 points, plus currency conversion, broker charges and stamp duty.

And of course, even though you are investing in a share on another country's bourse, any proceeds are likely to remain tax-free.
In fact, spreadbetting firms offer surprisingly attractive currency conversion rates. Some astute small company treasury departments even use spreadbetting accounts to hedge their foreign exchange rather than go through their bank, as the rate offered can be up to 0.5% more and a margin of only 2% to 3% is required.
A key benefit of trading international stocks is diversification. The UK is concentrated in mining and financials, says Ian O'Sullivan, marketing consultant at Spreadex, but you could buy a big-sector play such as Novartis in chemicals or Volkswagen in car manufacturing to diversify your portfolio, or an index on the German market to add some industrial exposure.

Unstable markets
Volatility is a spreadbetter's friend, creating opportunities to make a profit, and currently we're seeing volatility in abundance across many markets. Some overseas bourses such as the National Stock Exchange of India are particularly volatile.

Here the index of large companies - nicknamed Nifty 50 - has recently moved 5% on separate days and regularly 10% in a week. Nick Serff, market analyst at City Index, says the Japanese Nikkei 225 and the Nifty have been getting a lot of play, as well as the Dow Jones Industrials and S&P 500, which are consistently popular.

However, in practice most interest is geared towards the US, following stocks that are well known to UK consumers such as Google and Microsoft, says David Jones, chief market strategist at IG Index. But a range of other global market indices are available, including less accessible ones such as Polish index (WIG), Austrian index (ATX), Belgian index (Bel20) and Swedish index (OMX30).
Buying the index can be particularly advantageous in markets across Asia where you may feel the market is due for a sharp move one way or another, but have no conviction about which individual stocks will recover or fall.

It is also possible to spreadbet exchange traded funds (ETFs) that are linked to an index and offer a panoply of trading opportunities, including sector ETFs such as the Select Sector SPDR ETFs, and ETFs with style biases, such as growth or value.

In July 2009, record earnings from Goldman Sachs jolted the market out of its slumber, but opinion was very mixed on what would happen next. You could, for instance, have bought a banking sector ETF if you thought the news would lift the entire sector.
Bear markets are notoriously hard to shift, however, taking years to hit final low points. Japan is a good example. The Nikkei 225 index bottomed out for the first time at 15,000 in 1992, but has since plumbed a series of new depths in 1998, 2003 and 2008 when it sunk to 7,000. While the traditional stock investor has to wait until markets ebb lower, spreadbetters who buy short can still party.

This article was originally published in Money Observer - Moneywise's sister publication - in September 2009

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