Gambling online has been growing at a dizzying rate with some predictions stating UK online betting will rise from a current £550 million a year to £5 billion by 2003.
Betting on the Stock Exchange has existed for some time in the form of spread betting, which is taking a short of option on what a share or an index might rise to by such and such a date.
At the serious and professional end of the stock market, spread betting is said to take the form of Certificates of Difference (CFDs). CFD trading has mushroomed considerably with online dealing because, for the savvy and well-heeled, it can be a way of reducing costs.
A CFD is, quite simply, an agreement between two investors to exchange funds based on the underlying price movements of a share or other financial assets.
That is to say you do not actually own the shares themselves -you own the price movements. If the share goes up by 10 per cent you make a profit of 10 per cent. If it goes down then you make a similar loss.
The advantages are that as you do not actually buy and sell the shares you do not have to pay stamp duty or commission. Also you can buy on margin, that is to put down only a fraction of the share price to buy the CFD. Usually it is 20 per cent and you can lever this up.
For the really sophisticated and rich there are other considerations. You can deal out of hours. For example, if there is a nasty announcement on the US market after hours on Friday you do not have to wait until Monday to deal.
You can also sell short, a nerve-wracking process to my mind, where you sell shares you do not actually own in the expectation of buying them cheaply in the event of a market fall and make a profit. The spread between bid and offer is often smaller.
For shares, say, in Arm, a heavily- traded internet stock, the difference between buying and selling for shares is 120p but perhaps only 60p for a CFD. All this can amount to a considerable saving if you trade often and in big amounts.
If I buy 1000 shares at £1 each in, say, Technobabble Inc of Brighton, I pay £1000, plus, say, £15 commission and stamp duty at 0.5 per cent (£5 plus another £15). My outlay is £1,035.
If the shares go up to 120p the next day I have made a profit of £200 minus my costs £35, that is £165 or 16.5 per cent on my outlay on. I will have to pay tax eventually. But if I buy a CFD for a 1000 share, I put up £200. If they go up to £1200. I have doubled my money. If, on the other hand, they go down to 800p I have lost the lot with a CFD but still have £800 minus costs.
The two companies involved in CFDs in the UK, GNI and CMC Deal4Free, stress CFDs are only for the professional.
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