Spread Betting and Contracts for Difference Trading – A Risky Strategy?
What is Spread Betting?
Spread betting is essentially a way in which a customer can speculate on the price of a financial instrument or market without having to purchase the underlying asset. For example, this could relate to the pricing of individual shares, stock indices, commodities, currencies, or the outcome of a real world event such as the number of goals in a football match.
A customer may therefore bet on whether the price of an asset will go up or down and this will then result in a return if their prediction comes true or a loss if their prediction is incorrect.
What is a “Contract for Difference” or “CFD”?
Contracts for Difference or CFDs have a number of similarities with spread betting but also some distinctions in the way they work and are treated for tax purposes.
The purchase of a CFD creates a contract between buyer and seller in which the parties commit to paying or receiving an amount linked to the difference in price of an underlying asset or market from the point at which the contract is formed to the point at which it is closed.
Similarly to spread betting, the amount of profit or loss is linked to the price difference from the point at which the contract is entered into and the point at which the trade is closed. Many CFDs will remain open until a trade is closed, whereas spread bets have fixed expiry dates.
How do spread betting and Contracts for Difference trading work?
When you go to place a bet or trade on a market you think will rise or fall, you are presented with a buy and sell price. If you believe that the market might go up then you place your bet at the buy price, which is known as ‘going long’. If you believe that the market will go down, then you place your bet at the sell price, which is known as ‘going short’. The difference between the ‘long’ and ‘short’ price is known as ‘The Spread’.
If the market moves in the direction that you had opened your trade at, for example; you place your bet on the market going down, and it does so, then you start making money on the margin that you placed. However, if the market does not go down as you had predicted, and it rises instead, then you will lose money.
The amount that you may win or lose is dependent upon the difference between the price you open at and the price you close at multiplied by the amount per point that you bet (if spread betting) or the number of CFDs and the size of the contracts (if trading a Contract for Difference).
Both spread betting and CFDs trade using what is known as ‘leverage’. This enables potentially significant profits or losses to be achieved from the placing of a smaller deposit or ‘margin’.
Types of Accounts
When a customer opens an account with a spread betting or CFD trading platform, there are two main types of accounts which they may have; (1) a retail account; or (2) an elective professional account.
Elective Professional Account
In order to open an elective professional account, the customer must meet certain criteria in relation to their expertise and experience in trading, understanding of the relevant market, and their financial portfolio size.
Elective professional account customers typically receive various perks such as reductions in margin rates, collateral margins, access to higher leverage, and access to other exclusive features on their account. The trading platform may also provide the customer with a ‘relationship manager’.
However, this type of account exposes the customer to a greater level of risk, as they will not be provided with the same safety measures as a retail customer.
These accounts are designed for less experienced customers. Those customers will get various protections that elective professional account customers do not, such as; negative balance protections (i.e. you cannot lose more than the amount in your account); restricted leverage and other product restrictions. Conversely, those same protections might mean that there is less risk but less potential reward from a trade as well.
What might you want to look out for?
As spread betting and CFDs are complicated, risky and leveraged forms of trading, it is generally accepted that customers need to be considered knowledgeable and experienced with investments and the financial market in order to stand a good chance of making a return on their investment. Approximately 70% of retail investors lose money when trading.
It is important that a customer not only has an understanding of the market relating to their trades but also the risks involved in trading leveraged products, as the customer could lose significantly more than the amount initially deposited. In some circumstances, a customer can even end up owing money to a trading platform.
A customer should therefore be careful to ensure that they have the type of account which is commensurate to their knowledge and experience, and also that they can afford to lose the sums at risk.
How can Ellis Jones help you if you have incurred losses?
If you have incurred significant losses as a result of spread betting or trading CFDs, we can advise you on your case and may be able to assist you in obtaining compensation. You may be successful in recovering your losses if, for example:
- Your account was not suitable for you (e.g. because you lacked expertise, knowledge and experience);
- Your trading and investment aims have not been met;
- You were not sufficiently warned of the risks involved with your trading activity;
- You have been given unsuitable advice; or
- You have not been treated fairly.
The above is by no means an exhaustive list and there may be other circumstances in which a customer may have a potential claim or complaint.
We specialise in acting in relation to disputes concerning spread betting and Contracts for Difference trading and have been successful in recovering losses.
If you have incurred losses with your trading and feel that the trading platform you had an account with should have acted differently or have been at fault, please get in touch with our specialist team by filling in the enquiry form at the bottom of this page or by contacting us at TradingClaim@ellisjones.co.uk or on 01202 525333.
We would also recommend that anyone who may be suffering from any addiction or mental health issue relating to their trading seeks specialist independent medical and addiction assistance and considers implementing some of the various tools available to reduce such harm. Details of some of these can be found here on our ‘Help Beyond Legal Advice‘ webpage.
How can we help?
When you submit this form an email will be sent to the relevant department who will contact you within 48 hours. If you require urgent advice please call 01202 525333.