Spread betting for beginners

Most investors shy away from spread betting assuming it is all about gambling and has nothing to do with investing. This is not true. It all depends how you use it. It is perfectly possible to use spread betting for long-term investing and that is exactly what I have in mind.

This relates to something else to which I am attaching increasing importance. Successful investing is as much about your overall strategy as the stocks you pick. I now have five accounts on IG and I follow a different strategy with each one. I will discuss them all in future issues.

The idea, in a nutshell, is to do everything possible to make sure that my subscribers make money. I have just opened a new spread betting account which will be dedicated to the simple strategy to be outlined below. It will be very easy and inexpensive for any of my subscribers to follow.

Step one is to open a spread betting account. Mine is with IG and since I already had a spread betting account I have opened a new one, Spread Betting 2. It only takes a few minutes to do this.

The maximum leverage permitted to beginner investors on this account is five times. You put up one pound and IG lets you buy £5 worth of shares. You pay interest at a reasonable rate, similar to mortgage rates, on the entire position.

In this account I am only going to invest in a handful of ETFs – SPY for the S&P 500, QQQ for the Nasdaq 100, SOXX for semiconductors and IWMO for global momentum. All of these ETFs effectively track important indices and have been in strong uptrends since 2009.

I am going to start very slowly. There is no rush so I am going to buy one ETF each month and make the minimum investment possible under the spread betting rules. My first investment is going to be SPY.

I go to my IG account, select my Spread Betting 2 account and search for SPY. It offers me loads of options. The one I select is S&P 500 ETF (all sessions) for the period to September 2022. This means I am making a bet which lasts until then. This is not a problem because it will be automatically rolled over when that date is reached.

I prefer to deal in dollars rather than pounds for dollar investments so I change the unit of the bet from pounds to dollars. The minimum bet is 0.05. The way to understand spread bets is that you bet in cents per point. Working this through it means that a one point bet earns you a dollar for every cent the price rises which is exactly like buying 100 shares (one point equals 100 cents equals one dollar).

So my simple rule for understanding spread bets is that a one point bet is the same as buying 100 shares. This means that the minimum 0.05 point bet is the same as buying five shares. If I click to make a 0.05 point bet (buy five shares) of SPY it tells me (a) that my required margin is $480.23 or £355.83 and (b) that I don’t have enough funds. This is because there is no money in the account.

My next step is to transfer £500 to the account. I can now click the buy or place deal button, depending which IG platform I am using, and I will have bought the shares/ placed the bet. That’s it. All done. It is now down to how the shares perform.

Next month I will choose another ETF to buy from the small group listed above and so on ad infinitum. As usual I will never sell.

Just as with my new Rule of 10 CFD account all purchases will be funded by an injection of cash and any profits will be allowed to build on the account uninvested so the leverage should drop over time. This is important because I never want to be forced to sell.

In the early days my position will be small so I can settle urgent margin calls if they occur by putting more cash into the account just as I have already had to do with my R10 account. As the positions build I should have a cushion of accumulated profits.

The long term advantage of a spread betting account is that as far as the taxman is concerned these are bets and there is no tax on betting winnings. It is a very efficient way of investing. What I am trying to do is keep the benefits of leverage while in all other respects making it as risk free as possible. Below is my first deal.

SPY SPDR S&P 500 ETF Trust Place 0.05 point bet for September 22 @ 48107 cents ($481.07). Value of position acquired $2,405 approx. Cash injection required $481.07/ £356 approx.

The significance of buying the September 22 period shares is that all the cost of buying (IG’s profits) is built into the spread between a selling price of 47853 cents and a buying price of 48118 (latest price). It is the cheapest way of investing in these shares. As noted above the position expires in September 2022 but will then be automatically rolled over unless I do it manually myself.

If this still all sounds off-puttingly complicated just try doing it and you will soon get the hang of it. Remember it involves very little money so you can do it alongside any other investment strategies you are following. You may be pleasantly surprised by how well it works.

Stock selection is an important part of successful investing but so is strategy. In fact I am thinking more and more about strategy and finding new ones that I believe will work well. Part of this is about finding safer ways to gain the benefits of leverage but it is also because there are so many great shares out there that finding them is not that hard, at least if you spend a lot of time looking and know exactly what you are looking for. The trick is to take those great shares (and ETFs) and find ways to make money from them.

I believe the spread betting strategy outlined above will work well. It could hardly be simpler. Just place a small bet every month on one of a handful of ETFs which capture the strength of the American economy and the excitement of the technology revolution; that’s it.