Editor's note: Below is an article by Joshua Raymond, chief market strategist at City Index, the spread betting firm. A number of companies provide such trading platforms and services, such as Barclays Stockbrokers, TD Waterhouse and IG Index. As always, this publication wishes to stress that the views expressed here are not necessarily endorsed by this publication.

Financial spread betting is now one of the most popular products wealthy investors are using today to access and speculate on the markets. With many financial institutions and fund managers failing to meet their clients’ expectations during such challenging market conditions, wealthy investors are turning to spread betting platform providers as a form of DIY money management.

Previously, wealthy investors would allot a small portion of their capital to having fun and "taking a punt" on the markets through spread betting, contracts for difference and foreign exchange products, without necessarily expecting large scale returns. But things have now changed, with more savvy high net worth individuals putting money into their retail trading accounts, opening new ones, and taking on the markets as a way of managing their capital themselves. With this in mind, financial spread betting houses are creating more bespoke, personalised services, which are proving a big draw for high net worth investors, including dedicated VIP account managers and preferential pricing packages. In the case of City Index, for example, it caters for HNW clients with deposits of £75,000 (around $117,700) or higher through its newly expanded VIP sales trading team to help manage the growing demand for spread betting services from wealthy investors.

While wealthy investors make up a very small group of a spread betting firm’s overall customer base, it’s nonetheless a highly important and lucrative one. High net worth spread bettors often trade higher volumes and more regularly, generating more income for platform providers. The recent wave of volatility in the markets across August and September has seen client trading activity at City Index hit all time record levels, with August seeing volumes increase 48 per cent above the previous record month (May 2010 – the "Flash Crash" on Wall Street) whilst September saw a 79 per cent increase on the years monthly average trading volumes, which is no small part down to the firm’s high net worth clientele.

But spread betting providers are not the only winners. Wealthy investors benefit from having the opportunity to speculate on the full spectrum of major indices, equities, commodities and currencies, and profit from falling and rising markets alike. Moreover, spread bets are leveraged, allowing investors to take large positions with only a small initial capital outlay whilst the spread betting platform also gives traders a central point to execute whatever transaction suits their appetite, whether it’s trading the FTSE or hedging currency exposure, avoiding the need to have more than one broker to cater for all requirements. (Leverage carries risks: this is discussed later).

Then there is the hugely attractive tax side of the product, which has made it such a big lure for traders. High net worth traders choose this type of trading as an alternative to conventional share dealing because of how tax efficient it is; returns from spread betting is currently free from capital gains tax, amplifying the potential for higher returns if they make the right investments.

Given how little spare time wealthy investors have on their hands, the industry has gone increasingly mobile over the last two years, making big strides in developing mobile technology. Firms have developed a range of highly sophisticated and user friendly mobile trading platforms, which now exist for every popular type of handset, from iPhone, to Blackberry, to Android.

City Index launched the industry’s first ever live dedicated trading app for the iPhone in October 2009. Back then, 2 per cent of City Index’s client base would trade on their mobiles – today, that figure is closer to 25 per cent, and growing whilst today the multi-award winning City Index live trading app is seen as the best in the industry, winning the Financial Times Innovation Award 2010 and Money AM’s Best Mobile Provider two years running, both in 2010 and 2011. This makes it perfect for busy traders, who can now do everything they would ordinarily need to be at their PC for, at the flick of a button, or swipe of a screen, on their mobile phones. It not only saves time but allows traders to capitalise on volatile moves in the markets that can create opportunities for traders. This has become even more important of late, with previously unseen stock price swings.

Risks and education

While these swings and volatility create trading opportunities for wealthy investors, it comes with risk, which wealthy investors are often more aware of than the less experienced traders. Due to the geared nature of spread betting, even small movements in the price of the underlying security can result in large spikes or dips in a trader’s profit and loss, meaning investors’ losses can exceed the initial deposit if traders do not efficiently manage their risk. 

To cater for this, and to help sharpen their trading techniques, even the savviest high net worth traders are increasingly becoming involved in advanced trading seminars offered by all of the biggest spread betting providers, honing skills across a range of trading methods, including technical analysis, whilst spread betting platforms also have prudent risk management tools to help keep trading risks low, depending on one’s trading strategy. Spread betting providers want to keep traders on their books for the longer-term, so will always give them the tools they need to succeed throughout the duration of their trading career.

Most spread betting firms are hopeful that, with the background of market uncertainty and volatility, and a lack of performance from so many financial institutions who are charged with preserving these peoples’ capital, the number of high net worth investors who want to take more direct control over their finances will turn to retail trading. There is much to gain for both sides.