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Making investments from home - Spread betting

The current record low Bank of England base rate has anchored the interest rates offered by banks to savers at a near rock bottom rate. If you are saving up for home improvements, you may have already put some money in a cash ISA for the year - and this is one of the best ways to see your money grow predictably. However, the growth on even this tax-free fund will be modest in the current climate, to say the least, so if you have already reached your ISA limit, and are not afraid of a little risk, there exists a way of investing money from the comfort of your own home that can provide substantial returns if your instincts are right - and this is financial spread betting.

This financial instrument was invented in the early 90's to provide a tax free way to play the stock markets, and amazingly, this little loop hole has yet to be closed up - gains made from spread betting are still tax free. As the name suggests, there is a wager involved, and this of course means that there is a potential to lose as well as win money; so the two rules of thumb to follow (as with all gambling) are: only bet what you can afford to lose, and do a little research before taking the plunge.

Spread betting allows individuals to bet on the movements of the stock market without actually buying any stock, and the best way to explain this is probably through example. So, let's say that a spread betting company like Trade Fair is offering 3398 - 4002 spread on an index like the FTSE on the day that you log on to your account, and the underlying real-time value of the FTSE is 4000 points (see the Trade Fair site for more on spread betting). The lower price quoted by the spread betting company is called the 'bid' price, and this is offered if you are 'selling' stock; the higher figure is the 'offer' price, and applies if you wish to 'buy' stock. The difference between these two prices is the eponymous 'spread'. And of course, you are not really buying or selling any actual stock. Confused?

Ignoring the jargon for a minute, the crux of the matter is that you bet on how you think stock will change in value, and bet on the rise or fall in terms of pounds per point value change. So, given the example, you will 'buy' FTSE stock if you think that it will rise in value, and let's say you bet at £10 per point. You will 'buy' at the offer price of 4002 hoping that the value will rise by the end of the period of the bet (usually a day's trading) by at least 3 points to 4003 - in which case you win £10. If you think that the FTSE will fall in value, you base your bet on the bid price, and win if the value falls below 3398.

If you are completely new to spread betting, it is perhaps best to try out the practice accounts available online before betting real money. These accounts let you play the real time markets with imaginary money until you have become acquainted with the system.