Index Spread Betting

Index trading is one of the most popular spread betting markets which mirrors how they constitute many of the biggest global publicly-quoted companies. In fact trading indices is a way to take a position on a whole country’s national economy although one has to keep in mind that nowadays the whole world is interconnected and many of the biggest companies in a country are actually multi-nationals in nature. For instance, the FTSE 250 and FTSE 350 indices are a good barometer of the UK economy.

It is important to keep in mind that by placing a trade on an index market you will be trading on the aggregate performance of all constituent shares making up the index. For example the FTSE 100 is made up of the 100 biggest UK companies by capitalisation while the DAX 30 consists of the largest 30 German companies by value. Most spread trading companies will quote all the major indices, including those in the UK, USA, Belgium, France, Germany, Italy, Hong Kong, India, South Africa, Sweden…etc You can open a spread bet on the Dow Jones Industrial Average, S&P 500, Nasdaq 100 and Russell 2000 pretty much round-the-clock 7 days a week. Normally the margin requirement is about 1 or 2% of the effective market exposure, although the bid-offer spread can range from 0.5 to 4 points depending on the index.

Investors and traders normally use fundamental analysis (i.e. study of news and macroeconomic information that may influence an index’s level) and a mix of technical analysis (mainly the study of price action and past trends to forecast future movements) to trade the indices. One strategy that traders use revolves around identifying and trading trends. If they identify that a market is moving in a specific direction, they will take a parallel trade with the assumption that the index will keep moving in that direction.

Let’s take for instance Hurricane Sandy which hit New York City in October 2012 and caused losses to the American economy amounting to billions of dollars.  It was the first time the USA stock markets closed due to major adverse weather since 1985 when the USA markets didn’t open due to Hurricane Gloria.  Some of the biggest companies were impacted including the likes of JP Morgan and Citigroup who alerted their employees not to report for work and stay at home due to the severity of the weather and limitations of public transport.  In such conditions, given the extent of the damage one could assume that the Wall Street index is likely to open lower when the markets re-start trading.  You could place an order to sell and go short on the Dow Jones with a stake size of say, £10 per point, which would mean that you would gain £10 for every point the market moves below your entry level.  Of course, if you were wrong and Wall Street rallied, you would stand to lose £10 for every point it rose above your entry point.

An Example of How Profits are Made in Spread Trading

We will now go through with you an example of how profits are made in spread trading. In this example the FTSE 100 is being traded , which is the index of the 100 largest shares in the UK. Say that the FTSE 100 is at a level of 5000. You believe that the FTSE 100 is going to go downwards from this point. Therefore you place a ‘down’ bet. You decide on a stake size of say £10 per point for your trade (you could of course though bet with a stake value of pennies per point, if you wished to do so).

The FTSE 100 then drops to a level of 4800 and following the techniques you exit your bet at this point. You make a total profit of 200 points. This is because this is the difference between the original value of the FTSE 100 at 5000 and the value the trade was exited on of 4800. Therefore, the profit you make for this trade is 200 points x £10 = £2000. In summary:

Stake placed = £10 per point
‘Down’ bet placed at 5000 price
Bet exited at 4800 price
Point made = 200
Tax-free profit = stake value x points made
Therefore, your tax-free profit = £10 x 200 = £2000.

In volatile times you can use a system based on the health of the FTSE to decide whether to buy or sell shares. ‘So when FTSE looking healthy within channel I slow the sell signals (or speed up buy signals) and reverse when FTSE not looking healthy. This has kept me way ahead of the markets but it’s still been difficult.’

Index spread betting can be used for hedging but it take also be used for outright speculation by taking long or short position without having to rely on any particular stock. Other popular index markets include the Dow Jones, S&P 500, CAC 40 and the Nikkei 225.

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