Spreading betting was developed as a way for bookmakers to profit on both sides of the betting market. It was more profitable than the traditional betting scheme where almost all the money was cast on the favorite, while no bets were made on the loser. These principles have since been applied in a number of fields, most notable the financial sector, where spread betting has become very popular, and for some, very lucrative.
Technical Analysis in Spread Betting
In order to become successful spread bettors, people must know the basic mechanics of financial analysis. A spread bettor has knowledge of how resistance and support levels operate, how to identify market trends. This knowledge will be applied in several key ways when placing a bet:
- The successful bettor will be able to predict in which direction a stock or index will move.
- The bettor should be able to predict with some accuracy how much a stock or index will move (this will give the bettor a chance to effectively beat the spread and make a profit).
- Finally, the bettor must have the patience and self control to refrain from betting when indications are that there isn't enough profit potential
- And to resist betting when the stock has broken out of a particular pattern as well.
Fundamental Analysis in Spread Betting
Besides having a basic knowledge of technical market analysis, Spread bettors must know the ins and outs of the companies they bet on: their products, their competitors, their strengths and weakness, and especially their management. This is called 'fundamental analysis.' Obtain a copy of a company's reports and accounts over the last five years. This is a long enough period of time to begin to pick out trends by doing some simple calculations:
Contingent liabilities are hypothetical and may or may not occur based on a certain outcome. If a company's contingent liability figures are large in comparison to its capital (more than 10%) this means that the risks outweigh the rewards. Its best to pick another company.
Chairman's reports are great ways to infer what's going on from an insider's perspective. Look at how these reports are worded. If they use a lot of hypothetical statements with words like 'might' or 'should' or 'it is hoped that' then this doesn't show the greatest faith in the company's future.Check to see if the report has been qualified in any way by an auditor, this is not good, find another company.
Earnings Per Share and Return on Capital Employed are great indicators of how efficient the company's management is. Ideally both should be increasing. For ROCE there is a very specific formula to apply: Operating (or Trading) profit x 100 = ROCE percentage. This should be increasing yearly, a downward trend means to find another company. These are some interesting trends to note when seeking a company on which to bet. But obviously, good spread bettors have a strong mixture of knowledge in both fundamental analysis and technical analysis.
Spread Betting Strategies
People get involved in spread betting because of the high pay out potential, however it is a very risky proposition and more times than not, people lose their shirts while gambling on the market. So in order to make a profit there are a few rules to live by:
- Calculate and write off potential losses before making the bet.
- Use stop loss limits to minimize losses. Make sure to move them upwards if the bet is winning, in order to make profit.
- Cut losses quickly.
- Never hold on to a losing bet. In the financial sector things can only get worse, not better.
- Specialize in one or two sectors of the market and become an expert in these companies.
- Run profits until they meet resistance levels, and then quickly cut losses.
- Be vigilant of the bet and make sure to do good research beforehand.
- Make sure to understand how a bookmaker operates.
- Understand the effects of inflation, interest rates, and other factors outside the market's control.
Spread betting on financial markets has evolved steadily from the sporting world to that of high stakes financial profiteering. Its important to realize that to be successful at such a venture requires knowledge and good instincts. Making a profit requires good research and preparation as well as determination.
Sources:
Malcolm Pryor, The Financial Spread Betting Handbook. Harriman House, 2007.
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