Spread-Betting Is The HINWI's Choice For Shorting

by Carla Johnson, Investors Offshore

03 October 2001

As stock markets have dived in the weeks since the US terrorist attacks, investors have not been slow to spot opportunities to 'short' stocks in sectors particularly hard hit by the downturn such as transportation and hotels.

For the average investor, unable to access hedge funds and without the skills or the capital to use complex financial derivatives, the easiest way to "short" a stock is to open an account with a financial spread-betting firm. Although such betting is prohibited in most parts of the US, it is readily available on the internet for UK investors.

Spread-betting firms quote prices for a given stock or index at a future date. Investors can then bet on whether the price will be higher or lower than the firm's quote. IG Index, one of the UK's leading spread-betting firms, offers quotes on every FTSE 100 and FTSE 250 share.

Unlike traditional bookmakers spread-betting firms do not quote odds - an investor's winnings or losses are based entirely on the difference between the original quote and the final stock price. The potential for uncontrolled losses is the downside of the considerable profit opportunities, but a clever investor can limit loss possibilities with complex bets - it's no more difficult and probably much easier than understanding a football pools coupon.

The spread-betting sector has seen an uptick in activity since the disaster and one of the main beneficiaries is Cantor Fitzgerald, which lost 700 staff in the tragedy. High-net worth individuals who make up much of Cantor's clientele are reported to have made up to £250,000 at a time by using the company's Cantor Index to bet against movements in the stock market.

Cantor says that business has boomed in the last two weeks, but denies there is anything morally repugnant about the activity. "There were no basking sharks looking to capitalise on a nasty event. Everybody was terribly nice and did not sell, sell, sell when the markets first opened again on September 17, but after a couple of days of seeing the markets fall they realised they had to react," said David Buik, head of marketing at the Cantor Index in London.

One of the benefits of spread betting in the UK is that the gains are free of both income tax and capital gains tax since it is treated by the law as a form of gambling. Investors don't hold the underlying stock while they bet, so cannot benefit from dividends - but they are in and out so quickly that this doesn't matter. Spread betting can be used alongside conventional share ownership as a form of insurance against sharp movements in price, in the same way as derivatives. More sophisticated operators will eventually graduate to derivatives, which have a lower cost base. John Maynard Keynes got rich on derivatives; and Benjamin Disraeli went bust on them. 'Yer pays yer money and yer takes yer choice' as they say in London's East End.

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