by Peter Clements

Created on: February 18, 2008   Last Updated: February 27, 2008

Article: A New Way to Lose Money

I've just discovered "binary bets", a splendid way to make money without leaving the comfort of your bedroom. Or not, as you will see.

These bets are offered by so-called "spread-betting" companies. They offer the opportunity to bet on all sorts of financial instruments including indices, individual shares, commodities and currencies. The essence of the "investment" or, let's face it, "punt", is that it is geared. You do not have to buy say 1000 Marks & Spencer shares at say 4 pounds each, i.e. you do not have to have 4000 pounds. You simply place a 10-pound bet (you multiply the bet by 100 to get your exposure, so this would be the equivalent of owning 1000 shares) on M & S and if the price goes up by say 25p, your profit would be 10 times 100 times 25p equals 250 pounds, a return of 250% on your investment, sorry, punt. In order for you to make the same return as a holder of 1000 M & S shares bought at 4 pounds, you would need the price per share to go to 10 pounds. Wonderful, isn't it? But what happens, I hear you ask, if the price goes down? Well, the gearing goes against you and you can lose more that you put in. The solution is not to risk too much and to cut your losses quickly if the price moves the wrong way.

But, back to binary bets. A binary bet can only have two outcomes. The event occurs or it does not. The event occuring is represented by 100. The event not occurring is represented by 0.

Suppose that you think that at 6pm GMT today the Dow Jones (the index which measures blue-chip shares in the US) will be HIGHER than its opening level (it opens at 2.30pm GMT) you would "buy" that outcome. The price will be anywhere between 0 and 100. As time gets nearer to 6pm the price will get nearer and nearer to the eventual outcome. So, if the Dow is going up and is above the opening level, the price will get nearer and nearer to 100 until at the moment of 6pm it will close out at 100. If you bought that outcome at say 55 you will make 45 points (100-55). Your winnings will be 45 times your stake. Suppose, when you bought at 55 you wagered 2 pounds (the minimum bet), your winnings would be 90 pounds.

You don't have to wait until the bet closes out naturally. You can close it any time up to 6pm. The price will fluctuate during the life of the bet as the Dow fluctuates.

If you get it wrong and the Dow is LOWER at 6pm than when it opened the outcome will be 0 and you will lose 55 points times your stake, equals 110 pounds. If you can see it going against you you can close the bet out at any time up to 6pm and limit your losses.

The good thing about this, apart from limiting your losses (with spread-betting normally your losses are theoretically infinite), is that you don't have to agonise about HOW MUCH the Dow will be up or down. You just have to be sure that it WILL be up or down, depending on which way you're betting, even by a single point. (By the way, if it is NEITHER up nor down ie it's unchanged, you lose!)

Anyway, I tried this for a few days with some success and then came a terrible cropper last Friday. The FTSE (the UK equivalent of the Dow) had been down all day. It closes at 4.30pm GMT and last bets are at 4.29pm. At 4.28pm it was still down so I put 5 pounds on at 92.5 hoping to make 7.5 pounds (i.e. 100-92.5) times 5 (i.e. 37.50 pounds) in two minutes. Instead it limped the other way and closed UP! So I lost 5 times 92.5 equals 462.50 pounds.

A savage lesson. Take my advice: if you don't want to leave the comfort of your bedroom, find something else to occupy you.

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