Fickle spread betters value edge over loyalty
ZZZSPREAD BETTING has been in the UK for more than a decade now and it has been growing rapidly in popularity among the private investor community. But just who is your typical spread better, why do they use spread betting and what exactly do they think of all the providers battling it out for market share? The answers to all these questions can be found in a new report from Australian research firm Investment Trends, which conducted the first ever survey of British financial spread betters and contracts for difference (CFDs) traders on behalf of the spread betting industry in the UK.
So just how big is the financial spread betting industry? Only 83,000 spread betters have placed at least one trade in the past 12 months, which is fewer than you might have thought. And of these 83,000 spread betters, only a tenth also trade CFDs. (The number of traders who only use CFDs is estimated to be 10,000.)
Tim Howkins, chief executive of IG Group, says: “This survey shows that although the industry may have a strong and growing client base, there’s still plenty of potential to introduce many more retail customers to this innovative form of trading.”
And who are these spread betters? Well, unsurprisingly they are likely to be male. Just 7 per cent of active spread betters are women – an issue the industry is well aware it has to address if it wants to grow its client base. And most spread betters do so part time: only 4 per cent of spread betters consider themselves to be a professional trader. Indeed, there are as many retired people or students spread betting as there are professional traders. The majority either work in finance (15 per cent) or in computing (14 per cent).
And on the whole, financial spread betters tend to be highly educated individuals with 35 per cent having an undergraduate degree and 16 per cent a masters. More than 10 per cent of CFD traders have an MBA qualification and they are also more likely to have a graduate qualification than spread betters.
So why are these traders using spread betting and CFDs rather than using a stock broker or an independent financial adviser? Well, according to the research, the three main reasons cited by active spread betters are access to markets that would otherwise be unavailable, the ability to go short, and exploiting leverage to accelerate investment returns. Only 22 per cent of financial spread betters say that they use the product in order to hedge their existing investments, confirming spread betting as a predominantly speculative tool. Spread betting’s tax free status in the UK was also a consideration for 49 per cent of spread betters.
More than 80 per cent of frequent spread betters use technical analysis to decide on their positions, with less than half using business and economic news. Perhaps rather worryingly, 40 per cent of frequent traders say that they rely on their instincts or gut feelings to make a decision.
Although spread betting is seen as a way to make money from volatile markets, nearly a quarter of active spread betters say that market volatility stops them from trading more. A similar number also complain about the spreads being too wide, suggesting that they would be inclined to trade more if tighter spreads are on offer. Lack of funds and lack of time were also seen as big barriers to trading more.
The Investment Trends survey also looked at what spread betters and CFD traders thought of the providers. IG Index is the most popular by far, with half of all spread betters holding an IG account and 30 per cent using the provider for their main account. But white-label products mean that 49 per cent of clients also have City Index accounts, even if they are not branded as such.
This pattern is even more true for CFD accounts. A third of CFD traders have an account with IG Markets compared to 17 per cent for City Index. But in terms of the underlying CFD provider, City Index captures 62 per cent of all accounts held.
But the report also showed that spread betters will not hesitate to change providers if they experience problems or find a superior offer. Industry churn is running at 29 per cent per annum – meaning that three in 10 active spread betters switched providers last year.
Matt Tooth, the managing director of IG Index, says that these kind of figures show just how important it is for spread betting providers to have a reliable and accessible platform.
For Tooth, having technology that allows traders to take out positions when they want and at the price they want without trouble is the key to holding onto clients.
The spread betting industry has plenty of room to grow as people start taking their investments into their own hands.
But providers will need to ensure that their technology is up to scratch to capture their share of this growing market.