Well, there are two ways. You can own a chunk of a successful spread-betting firm or you can be a spread-better and get things right. Miraculously, I have managed to do both. I shall come back to that.
First, let me tell you how it works. How many runs will England make in the first innings of their next Test match? The bookmaker — all spread-betting firms are bookies, whatever gravitas they may attempt to assume — might quote 260–270. You think they will make more than 270. So you ‘buy’ at 270, staking £10 a run. England make 350 runs. So you are right by 80 runs and, at £10 a run, you make £800 profit.
The quote at 260–270 might just as well have been a share price, in pence. It makes no difference. Perhaps you ‘bought’ £100 per point at 270p. In that case, you made 80 times £100 — that is, £8,000. Furthermore, that was free of all tax, just like your cricket bet, because there is no tax on betting -profits.
But is that not monstrous? Why does the Chancellor not close the loophole? How can it be right to allow people to deal in shares and pay no capital gains tax on their profits? I have never asked a chancellor that question but I am sure that I know.
The fact is that spread betting is a boon to the Chancellor. Taken as a group, the punters will be wrong as often as right and, though dealing is nothing like as expensive as buying and selling shares through a stockbroker, the expenses will mean that the clients as a whole are losers. The point is that the losers cannot set those losses against their capital gains. Furthermore, the firms pay betting duty and corporation tax. And their now large number of employees pay PAYE etc.
Now, let us get back to how to make money. In spring 2001 I thought the Dow Jones Index was too high. As I had just become rich by floating IG Index, the spread-betting firm which I founded, I made a substantial bet with a competitor that the Dow Jones Index would fall. It did — a lot — and I doubled my bet. The Dow fell a lot more. I increased my bet substantially. It fell a lot more still! Then came an event which no decent person would possibly welcome but which, if it were to happen, could not possibly have happened at a more appropriate moment (for me), 9/11. The market plunged: my bets closed, fortuitously at the market low. I virtually never tell my wife about the ups and downs of my gambling life, but this time I thought I would. My wife hates this story but I have decided to risk it.
me: Darling, I thought you might like to know that I have made one and a quarter million pounds on a bet.
wife (in uninterested voice): Well done, darling.
wife (in animated voice): Now, about the flowers….
Right, so a spread-better can make huge (tax-free) profits. The risks, however, are great, and in practice increased a lot by the fact that the punter only has to provide in advance a small proportion of what he might lose.
Let me now consider the position of someone who, nearly 40 years ago, decided to take the mad gamble of investing £5,000 in my company, IG Index. His investment of £5,000 was made up of 100 shares at £1 per share and £4,900 of loan stock. His loan stock was paid off with interest about three years later, leaving him with a £100 investment in the shares. When we sold out in a management buyout in 2003, those 100 shares went for about £12 million.
I had a much larger shareholding than our £5,000 investor. So I made a small fortune. However, my decision to sell, which, to my chagrin, also involved all the other original shareholders, proved to be easily the biggest mistake of my life — even bigger than getting a bullet through my lip by carelessly sticking my head up on National Service; and that scarred me for life, substantially reducing my chances of marrying Raquel Welch. The shares shot up to some 15 times what I sold them for. If I had held on to them I would not have bothered to take on, as I have, the job of being treasurer of Ukip. I would simply have given the party £5 or £10 million without noticing it!
Be careful: you can lose a very large amount as a shareholder. All the IG shareholders nearly lost the lot in the 1987 crash.But you don’t have to worry now: the company is very strong.
What of the future? The growth in the market has been phenomenal. Can it continue? I am inclined to think so. In my day most bets were placed by telephone. Now the overwhelming majority are online, with execution almost instantaneous, and if you expect to get things right, as of course all punters do, the fact that profits are free of tax will continue to be a great incentive. So if you are a spread-better, the opportunities are certainly there, as are the risks. I believe the punters will accept the risks because of the rewards.
One final point: the overwhelming majority of IG’s clients in my day were speculators, hoping and expecting to get the market right, but there is a prudent and inexpensive use to be made of spread betting. You think the stock market is too high? If you sell your shares you will have a huge capital gains tax bill. So sell the appropriate index through your spread-betting firm. You have not sold shares: so no capital gains tax. If you are right, you will pay no tax on your spread-betting profits. Your expenses are very low compared with those of dealing on the Stock Exchange.
To sum up, you can make huge sums by spread betting, or by owning a bit of a spread-betting firm, but the risks are formidable.
Stuart Wheeler was a founder of IG Index, and is treasurer of Ukip