Spread Betting On Indices
When referring to indices (an index), we refer to a collection of stocks that form a portion of the market. Depending on which index you choose, the criteria for which constituents form the index, and how the overall index is weighted will vary.
The idea behind an index is to help better understand how certain markets are behaving economically. For instance, the FTSE 100 takes the UKs 100 largest companies and provides an insight into how they are performing collectively. If you were to take just one of those companies and see that its shares had fallen by 5%, this would not really give you an overall picture of the wider market, which is where the index comes into play. Many indices such as the FTSE 100 are seen as a good indication as to the overall health of an economy or sector, in this case, that of the UK economy.
Many first time spread bettors think that betting on indices such as the Dow or FTSE will be easy pickings. This isn’t to say spread betting on Indices should be avoided, but without any pre-planning and homework it will be nothing more than gambling.
Main market indices can easily move 100-200 points in a day, and while it may seem like easy money, a market heading in the opposite direction to your spread bet can be dangerous. The Dow Jones has had a few 700+ point moves in its history, with a 936.42 point move in one day back in 2008. A £5 bet in the wrong direction without a stop loss on this day could easily have turned an innocent looking bet into a £4,682 loss (ouch!).
Spread Betting Indices Tips
When spread betting indices, consider some of the followings points:
- Remember 24/7 Trading
Most spread betting firms take bets on the main indices 24 hours a day, with prices changing through the night. You should not be betting on the FTSE with a spread greater than 1 point. Out of FTSE trading hours this spread will widen to between 5-6 points, depending on spread betting firm. Over night, spread betting firms will make their price based on the movement of other markets.
- Look For Tight Spreads
Fundamental to any spread bet, it’s imperative you get the best (tightest) spread for your bet. No decent spread betting firm should be charging more than 1 point for the FTSE during the day, or 2 points for Wall St. / Dow. Overnight spreads will be larger, but the FTSE should not be more than 5-6 points overnight.
- Avoid Going Against The Trend
Beginners often look at charts and think because it’s reaching a previous price point that it’ll swing in the opposite direction. If you do decide to go against the trend, do so with an educated reason. Don’t try to second-guess, you will loose a lot of money this way.
- Have A Plan
Always have a plan for your bet. Know why you are going in to the bet for the price you are, but more importantly be sure to set a stop at which point you exit your bet, and which point you take a profit. Stick to the plan.
- Hold Your Nerve
If you went into your bet with good reason and judgment, stick to the plan. It’s easy to loose your nerve and bail out of a bet early, but if you set up your stop loss and limit order, stick to it.
- Consider Which Companies Form The Index
The index will be guided by these companies. The larger the company, the more a change to it's individual share price will effect the overall index.
- Find Out When Result Days Are
The share price can change on results day. Be aware however that even on good results the share price may well drop as smart traders look to make a profit on the back of amateur investors buying on the good news. They’ll likely buy back once the share price settles back down to a lower figure than what they sold for. It’s more than likely the expected results were known ahead of time. Buy the rumour, sell the fact.
- Use Your Tools To Limit Loses and Take Your Profit
Most sites offer a range of tools for automating tasks that allow you to automate the opening of positions, as well as closing them too, whether this is to take your profit (limit order), or to exit a bad bet (stop order or guaranteed stop). With your trade plan in place, you can setup your bets to be executed according to your pre-planned strategy; helping to take away some of the emotion that can cloud your judgment when watching live prices fluctuate up and down.
Popular Indices
FTSE 100 Index
The FTSE 100 Index is comprised of UK’s 100 most capitalised blue chip companies, which equate for around 85% of the UK market. The success of the FTSE 100 is seen as an indication as to the overall performance of the UK’s economy.
Spread betting companies will usually offer a smaller spread on companies that form the FTSE 100 as they are considered less volatile (less likely to go bust) than smaller companies such as those found in the FTSE 350 index.
AIM
The AIM (Alternative Investment Market) is listen on the London Stock Exchange, but open to start-up companies from around the work who are aiming to raise capital for their businesses. Considered the most successful growth market, the AIM is an entrepreneurial playground.
Due to the type of index, the AIM is considered more volatile than indices that comprise of long established companies.
Dow Jones
The Dow Jones Industrial Average (or Dow 30) is a US listed index, which takes 30 large, publicly owned companies which span different sectors, giving an overall snapshot of how the US market is performing. Companies in the Dow Jones include IBM, McDonalds, Wal-Mart, Boeing, and Walt Disney.
S&P 500 Index
Second to the Dow Jones, the S&P 500 is the most followed index consisting of large, publicly traded US companies. Started in 1957, the S&P 500 is an amalgamation of US companies that are listed in both the New York Stock Exchange and the NASDAQ. Previously the S&P 500 was a market value weighted index, but is now a free-float capitalisation weighted index.
Hang Seng
The Hand Send index is Hong Kongs largest index, and is an overall indictor as to the general performance of Hong Kongs economy. Started in 1969, the Hang Seng currently consists of 45 companies and is one of the most traded Asian indices. The Hang Seng Index is a free float-adjusted market capitalisation weighted index.
Nikkei 225
Listed on the Tokyo Stock Exchange (TSE), the Nikkei 225 is the most quoted index of all the Japanese indices. Calculated daily by the Nihon Keizai Shimbun newspaper, it is a price-weighted average of over 1,700 stocks.
Most notably, the Nikkei rose to an all time high of 38,957.44 at the peak of the Japanese asset price bubble in late ‘89, when shortly after there was a spectacular crash which saw huge losses as the bubble burst. Today it trades at just over a quarter of it’s ’89 price.