Spread betting is one financial venture that definitely requires a health warning – it has been described as the ‘crack cocaine of investing’.

This is definitely not a punt for the financially naïve or foolhardy – note that it’s called spread BETTING not INVESTING. But these days you can place stops on your bets to prevent money bleeding uncontrollably, so let’s see how it works.

Spread betting originated to offer a range of outcomes on a given event, whether it’s the result of a football match, the price of gold or, most popular in Britain currently, the movement of the stock market.

It allows punters to either bet that the index will rise, which is called ‘buying’ in the parlance. Or that it will fall, which is called a ‘sell’. The advantage for the broker offering the spread bet is that he is able to take bets in a falling market.

And by taking bets on both sides of the market, the losers will tend to cancel out the winners. Meanwhile, he’s making his profit on the difference between the buy and sell prices … the spread in other words.

An example makes things clearer. Say the FTSE is trading at 5998. The broker might set his estimate at where the index will finish the day at 5996-6000 points. This is a four-point spread, with the lower figure (5996) being the sell price and the higher (6000), the buy price. Now let’s say you have done your research and you reckon the FTSE is going to fall. You wager £10 a point on that outcome. You now ‘Sell’ at 5996, which simply means you’re placing your bet at that price.

Hurrah! You got it right, and the FTSE dips to 5950 at the close. Your broker is now offering a spread of 5948-5952. You decide to cash in your chips. To do so you have to BUY at the new buying price, ie 5952. Subtract this new buy price from your original sell price – that’s 5996 minus 5952. 44 points at £10 a point, or £440.

Your pal, meanwhile, had bet that the FTSE would rise, and made a ‘buy’ bet at 6000. But every point the index falls below his buy price costs him £10. He closes at the new ‘sell’ price of 5948, a loss of 52 points and £520.

It would work exactly the same way, but in reverse of course, if the market rose. The thing to remember is that ‘buy’ bets are always cashed in at the ‘sell’ price, and vice versa. The sharp eyed will have noticed that, with the way the ‘buy’ and ‘sell’ prices are set, the system ALWAYS favours the broker. The bookie (for that is what he is) always pays less to the winners than he snatches from the losers. This spread is where he makes his money.

Also note that while your gains are, theoretically, limitless, SO are your losses. In practice though, rather than letting the bet run, people can limit their losses, either by electing to close the bet at ANY TIME, or by setting a Stop-Loss mark at which the bet will automatically close.

You then have to settle at the SELL OR BUY price the broker’s offering at that time. Note that you don’t set a limit on your potential winnings … though how far you want to let a winning bet run depends on how strong your nerves are.

It could be a day, or you could let a SELL bet run for months if you think the market’s going to keep falling.

Okay, you realise by now that spread betting isn’t for the faint hearted. But it CAN play a serious role in a financial portfolio.

First, it’s a way of hedging your bets. If you have money invested in the stock market, you’re presumably investing in the hope that it will rise. Placing a ‘sell’ bet on the FTSE means that if it falls, you STILL gain. You’re backing both sides of the market.

It also means you can invest in a huge range of financial products – there are spreads on sports fixtures and property prices, on commodities and individual stocks as well as on stock market indices around the world. If it exists, you can probably place a spread bet on it.

With financial spreads, you’re exposing yourself to the stockmarket without actually buying shares – so no share dealing costs and no capital gains or income tax to pay on gains.

It’s also, undeniably, exciting … though the excitement of gambling can lead you into deep waters as you attempt to recoup losses. Approach with caution!

Buy a share. That could mean shared ownership or buying with a friend of sibling. But before you do, find out about so-called ‘pre shack’ agreements – the house buyer’s version of the pre-nup. It will save lots of tears later.

If there’s an area you really fancy look in the postcode next door. London particularly has seen gentrification spread from area to area, as buyers spill over after being priced out of a popular part of town.

People have tunnel vision about where they want to live, but try looking a half mile down the road … you might be surprised.

While existing property owners may bemoan the falling market, it can only be good news for first-time buyers, assuming they’re able to raise a mortgage that is.

The enormous blocks of new-build one and two bedroom flats that have been mushrooming around British cities are built to be sold at a premium, being glitzy and new.

But as buyers and buy-to-let investors dry up, developers are looking to offload stock. Look for dramatic price reductions and go in with silly offers … they can only say no.

Every home insurance policy has a premium based on risk. So, once you’ve got the cheapest policy, you can cut the cost even further by ensuring your house is protected to the maximum. This means ensuring you’ve got approved deadlocks on your doors and windows, an alarm system, even a dog. Of course, the costs may outweigh the saving you make … but then you’re also protecting yourself against being burgled, and it’s hard to quantify the emotional cost of that.

Now you have to shop around – millions of us are simply inert, renewing automatically each year with the same company, and that certainly means you’re not getting the cheapest deal. You won’t find a better way of doing this than going to one of the price comparison websites, such as moneysupermarket, confused.com or quotelinedirect. Once you’ve got a steer from one of these, you still need to double check the premium at the insurer’s website – certain aspects of your situation may change the premium dramatically. And don’t forget … you can haggle. Tell your insurer you’re getting a better deal from Direct Line, Elephant or whoever, and they’re likely to move on price.

There aren’t many things to be said for being ill but, in the spirit of always extracting a silver lining when it comes to your personal finances, it CAN be good news for your pension. The amount you’re given each month is fundamentally determined by how much you’ve paid in over the years of course. But further than that, there are some very precise calculations going on. It’s the job of actuaries to calculate exactly how long – given your health history and personal habits, smoking, drinking and the rest – you’re likely to live.

Their task is to ensure that you depart this life with a reasonable pension, but one that leaves your pension provider in credit, so they carefully eke out the cash to ensure that the annuity returns to you are attractive enough (they want to attract new customers after all), but not so good that they’re subsidising you into your second century.

Now things change, certainly between your taking out the pension and hitting 60. Sadly, we’re all likely to develop conditions that may shorten our life expectancy. If so, let the insurer know, as it may well occasion an increase in the amount you pull in every month. The doctors and the government may well tell us to quit the cigs and the booze, exercise and munch five pieces of fruit a day, but to the pension companies there’s no better customer than the rotund bon viveur who retires and promptly pops his clogs.

Cancer, heart disease and diabetes are bad news for your longevity, but will get you an increased annuity while you’re still around, while even asthma has recently been added to the list. So let them know, take the money and enjoy it while you can!

This week on Wallet Watcher John Rennie takes a look at how investing in the stock market historically beats putting your money anywhere else, plus dispelling the classic myths of good financial management – not paying off your mortage and that not all bank charges are bad.

As always please send your emails to walletwatcher@btpodshow.com

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Stock markets, as we know, rise and fall, at times dramatically.

Nonetheless, historically there has been no better way to make your money grow, with average yearly increases over the 20th century – of around 11%. The key word here is average.

That century includes horrors like the Wall Street crash of 1929, Black Monday and the dotcom crash.

It also includes periods of sustained growth, Bull markets. These included almost the whole of the 1990s, and a strong run from 2003 to 2008.

The bear markets, when share prices fall, are shorter lived. We had a bear market between 2000 and 2002, in the wake of the dotcom boom.

More frightening for investors are the dramatic crashes. On Black Monday, in 1987, it lost a quarter in just a few hours.

Close up, the falls look a terrifying rollercoaster ride. From a distance they appear merely ‘corrections’ in an upward climb.

An investor who held tight through Black Monday saw shares back to their previous level a year later.

So we know shares beat other investments over time. We have seen spectacular rises in property in the last decade but that’s changing.

Since the 1950s, UK property has risen 3% a year on average, shares 11%. We know that most managed funds, such as unit trusts, will only match the market at best. To outperform the market you need to do it yourself.

If you’re going to pick stocks though, you need to learn your stuff.

Rule 1 is research. The more you learn about the companies or sectors you specialise in, the better you’ll become.

You need to be able to read and understand their balance sheets. Otherwise you might as well join the mug punters in the bookies, putting your money on a horse because you like the name.

So although you might eventually develop a supernatural sense for rises and falls – don’t count on it just yet.

There are thousands of companies, on a growing number of stock markets (several in London alone). It’s an idea to trade on what you know.

If you’ve knowledge of software, sugar beet or mortgage broking, then research companies in those areas.

You also need a clear strategy on when to buy and sell your shares – otherwise you risk getting blown all over the place.

Share price falls and surges aren’t to do with a thousand brokers coolly making rational decisions – many of them are panicking or getting overexcited – following the herd.

Remember too that just because a share falls it doesn’t mean it’s a dog. If you’re still convinced a certain stock is sound, it can make sense to buck the trend.

It also means you buy cheap. Think about it. If you do what everyone else does, then you might as well invest in a tracker fund. It’s a lot less time and work.

You need to understand what a company’s share price means. You’re going to need to read company reports.

If this sounds dull, then going it alone isn’t for you. But remember top investors don’t rely on inside information (that would be illegal) but on information gleaned from assiduous reading of published data.

That doesn’t mean City-style number crunching on super computers – just a brain and a pair of reading glasses.

Back to your strategy. You need to ascertain the value of a share. ‘Cheap’ alone isn’t good enough.

Classic measures include price/earnings ratio, earnings per share and price to earnings. What investors call FUNDAMENTALS.

You’ll be picking a smaller number of shares than the big funds. That means your ride will be rockier – one share losing 30% of its value overnight can make your portfolio look very sickly.

Can you cope with the rollercoaster, AND hold your nerve that you know what you’re doing?

It’s a long game. You might do all the homework and STILL underperform the market and the fund managers.

Conversely, if you do well, don’t get carried away. Anyone can look good in a rising market. And ask yourself … are your shares possibly now OVERVALUED?

Finally, although you want to stick to your strategy, be open minded.

Learn! If your stocks aren’t performing, you need to be honest with yourself. It’s not the stocks’ fault, it’s your fault.

Ask yourself what went wrong and why? Did you do your homework? Can you take that setback as a useful lesson?

And if you need inspiration, look at not just the Warren Buffets, but the thousands of small investors who make a good living and get immense satisfaction by outperforming the pros. It can be a scary ride but an exhilarating one.

A common myth is that it makes sense to pay off the mortgage. Lovely though it would be to get rid of your monthly payments, mortgage debt is one of the cheaper way you’ll find to borrow money.

Before you consider it, ensure you’ve paid off all your higher interest debts, such as credit cards and personal loans. Otherwise you’re effectively borrowing expensive money on your credit card to pay off cheap mortgage debt.

Everyone complains about rip-off bank charges. You know the sort of thing … £25 to send you a letter saying you’re £5 overdrawn.

But before you join the chorus, consider this. Those outrageous charges are subsidising free banking for everyone else.

If the banks start to scrap charges, we can all expect to pay for our current accounts. So stay in the black and be thankful someone else is paying for your business.