If you have £1,000 of savings, and you want to invest in the stock market, what is the best way to do it?

If you have the time and the inclination to research companies, you could buy shares directly in a handful of companies and manage your investments yourself.

However, if you don’t have confidence in your own stock-picking abilities, you could buy units in a unit trust or other collective fund. A fund manager makes decisions about which companies he should invest your money and takes a fee for the service.

If you don’t fancy paying the costs for professional advice, you could put your £1,000 into an index or tracker fund. This would diversify your investment across a wide range of companies and ensure that you get the same returns as the market average, no better, no worse.

All these options are valid. None are inherently better than others. Their suitability depends on your personal circumstances.

However, there is another option which will, potentially, allow you to make much higher returns from your £1,000. It’s known as spread betting.

Spread betting is a form of trading in which you bet on the price movement of a share, index, currency, commodity or bond. It is a way of playing the stock market without actually owning any shares.

The idea was born in the 1970s by a 35-year old investment banker called Stuart Wheeler. But it is only since the late 1990s that spread betting has gained  widespread appear.

Basically, it provides access to financial markets that were previously available only to institutions, banks and wealthy investors

How?

The three main catalysts are the internet, the prolonged bear market of 2000 to 2002 and simplicity of spread betting.

Internet

The internet jump-started enormous changes to the workings of the stock market. First, it allows easy access to market information that traditionally was only available to institutions and wealthy investors. Second, it allows investors to try their hands at investing  ‘anonymously’. Third, only trading systems have lowered charges to a level that is practical for both the average investor and the spread betting company.

The bear market of 2000 – 2002.

Spread betting is ideal because unlike conventional share dealing, it allows investors to bet on prices going down. The falling markets provided plenty of these so-called ‘short-selling’ opportunities.

Simplicity

Spread betting is a type of derivative. A financial instruments that is ‘derived’ from an underlying market such as equities. Of all the derivatives available, it is one of the easiest to understand. However, recently this has been overtaken by the simplicity of binary options trading.

In 2003, while volumes in traditional share dealing fell by 30%, volumes in spread betting rose by 25%. In the same year, the total value of the contracts traded was more than £20 million per day.

From one product (the gold price) in the 1970s, there are now more than 4,000 financial and non-financial instruments to choose from. Financial instruments include equities, commodities and indices. While non-financial ones include sports and fancy bets.

In short, the industry is continually changing shape to reach a wider market.

Spread betting is provided by Admiral Markets and London Capital Group.

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