Why do so many Spread Betters Lose?
But as I understand spread-betting, the interest cost on spread bets is (??) 1% or 2% a year nowadays, and round trip spreads are 0.5% or so for midcaps which isn’t all that different from normal share buying, so if the aggregate of spread-betters could beat 1% or 2% a year by 0.5% times their deal numbers per year then they should be ahead. Is it so difficult to beat (??) 2% or 3% a year? WHY is it that in aggregate spread-betters lose money?
Because they are over-trading. If you use a spread betting account as a proxy for a share portfolio, maybe to avoid CGT, then you should expect a long-term return close to that of the market which should be higher than the 1 or 2% costs.
Thing is that I don’t see the odds being stacked in the spread betting companies favour! Unlike in a casino, when things are stacked against the punter, in a spread betting portfolio since the market tends to go up in the long term by whatever, 5% or 10% a year whilst costs are 1% to 3% a year, as I see it things are stacked in the punter’s favour providing they behave sensibly.
But that’s not how most SBers work. They will be turning over the same capital many times in a year and paying the dealing charges (spread) each time. So they lose money in the same way that someone buying and selling shares frequently will end up down simply because of the dealing costs associated with churning. This is true even if using the good money management method of only placing 5% capital on any one trade. Many of course don’t even do this and they will often lose even more quickly simply because they run out of capital more quickly.
A long time ago I used to place sports spread bets, mostly for fun (small stakes). I kept a record over the years and when I looked back at this I found I had lost an amount almost exactly equal to my total bets X spread/bet. I still use spread bettingbut only (or mostly) for financials and only when I feel I have an edge. So far I’m in the black but patience is key.
Suppose a punter has an imaginary £1,000 in his spread betting account, the way I see it he should aim to only use about half of that at any time to give him a margin to ride out downturns, so he’s using £500 as initial margin which allows a notional ‘spread betting portfolio’ of say £5,000 exposure of midcaps (ie 10% initial margin). The market goes up by (choose your figure) 5% or 10% a year on average, so let’s say his gain is about £400 pa (at 8%) whilst his costs are about £100 (at 2%), so he’s making about £300 a year which is a 30% return on his £1,000 capital employed. That’s roughly the basis on which I run a semi-permanent SB portfolio nowadays, and I’d like to think I can beat the market by a bit with my stock selection. The game seems to me to actually be stacked in my favour, and if 90% of spreadbetters are messing it up either I’m not understanding things right or they’re making a lot of mistakes.
In this example the usually unused capital is about £500, ie the punter can ride out a 10% market downturn without having to deal out. Of course sometimes things are worse than that, but IMO that covers most eventualities.