Once the preserve of City dealers, spread-betting — which enables you to gamble on the direction of shares, commodities or stock market indices — is becoming more popular among ordinary investors, with as many as 150,000 now taking part. But don’t even think of joining them until you have read our ten things you need to know.

1. Health warning

Spread-betting is gambling, not investing. You are taking a punt on the future movement (either up or down) of a share price, index or a commodity. Remember that the odds are in the spread-betting company’s favour and that your potential losses are unlimited.

2. Tax break

As spread-betting is gambling, all profits are free of capital gains tax — that’s if you make any profits, of course.

3. How it works

The spread-betting company will quote a bid (selling) and offer (buying) price for the FTSE 100 index, say 5,016 and 5,018. The difference between these prices is the spread. If you think that the index will rise, you might “buy” at £10 a point at 5,018. If you allow your bet to run until the market’s close and the FTSE rises to 5,053, your profit will be the difference between the closing price of 5,053 and the opening price you were quoted (5,018) times £10, giving a total of £350. If you wanted to bet that the market will fall, you would “sell” at 5,016, hoping that it would drop below this level.

4. Practice run

Most companies will allow you to practice first using an online trading simulator. IG Index (www.igindex.co.uk) and Cantor Index (www.cantorindex.co.uk) are the biggest players.

5. Pain barrier

Set up a “stop-loss” limit, which will close your trade at a set level if the price moves against you.

6. Correct timing

Some spread-betting participants close their trades daily, but you can leave positions for longer. A woman who took out two bets on shares in Google at £1 a point and £2 a point held her positions open for more than two months. She made a £27,000 profit.

7. Technical support

Waking up one morning and deciding to have a random punt on a share is not a successful strategy. Spread- betters are increasingly using charting tools, which show how a stock or index has performed. Ian Jenkins, of Cantor Index, says: “There is a definite shift away from fundamental traders, who use their gut feelings, to quantitative traders, who are dispassionate.”

8. The Katrina effect

Oil has been a source of great speculation after Hurricane Katrina. Currencies are also popular, with active trading on the pound-dollar and euro- dollar contracts. Magnus Cranny, of Cantor Index, says: “We are seeing an increase in bets on FTSE 250 stocks and Alternative Investment Market stocks. Shares that are the subject of takeover rumours have also been popular.”

9. Golden touch

There has recently been a resurgence of interest in gold. Will Armitage, senior quoting dealer at IG Index, explains: “Gold is trading outside a 30-year range, which has excited technical investors.”

10. Risk reduction

Some investors use spread-bets to hedge, or protect, their positions. But the usual risk warnings apply. For example, someone with £10,000 invested in a FTSE 100 tracker fund and who is worried about a fall in the stock market could “hedge” the position by selling the FTSE 100 index on a spread-bet. If the index closes at 5,386, an investor can sell at £1.86 a point (£10,000/5,386). For every point the FTSE 100 falls, the investor will make £1.86 on the bet to cover losses in the tracker fund.

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