FTSE Spread Betting
Dabbling in stocks and shares is a common pursuit but it can be difficult to get started. Learning all the nuances of individual stocks can be time-consuming with so many possible factors to take into account.
An easier way to start is by trading on indices as a whole; anticipating how the FTSE will move can be far more straightforward than studying its individual components.
There are many different options to spread bet on the FTSE 100 but all involve being able to accurately predict which way the index is likely to move. Like other forms of financial spread betting and unlike conventional stocks and shares dealing, it is possible to make money even if the FTSE moves lower.
What do traders mean by FTSE?
When traders refer to the FTSE they usually mean the FTSE 100, but there are several other FTSE 100 indices. The FTSE 100 is made up of the top performing 100 companies in the market, but there is also the FTSE 250 and the 350. The FTSE 250 is the next 250 companies, some of which could be considerably smaller than those in the FTSE 100. The FTSE 350 is a combination of both indices.
Although there is no reason why you could not spread bet on the 250 or even the 350, it is important to research the specific index you intend to trade on. Differently sized companies move differently and by larger and smaller amounts and applying the same strategy to all the FTSE indices could be catastrophic.
One of the common bets traders like to place on the FTSE is whether it will increase or decrease by a given time, usually the end of the session. A broker will offer a spread and the trader will open with one price and close with the opposite end of the spread. The range of movement determines how much is won or lost.
How a FTSE spread bet would look
The easiest way to demonstrate this is to provide an example. If you believed the FTSE would be higher by the end of the day, you would choose to ‘buy’ the price (even though in reality you never actually own anything). If a broker were to offer a spread of 5670-5671, the buy price would be the higher of the two – 5671.
You bet £1 per point of movement and watch to see how the market performs. By the end of the session, you have been proven right and the FTSE has risen, with the spread now 5700-5701. You opt to close your position, which means the lower price comes into use – 5700. There is a 29-point movement in the right direction (the difference between your buying and selling price), which at £1 a point means you earned £29.
The same principle applies if you decide to go short, in other words if you believe the index will drop. Using the same example, you would open your position by selling, using the lower price of 5670 and would use the buy price to close. If the market had moved upwards you would have closed at 5701 – a loss of £31. However, if the FTSE had dropped, ending up at 5640-5641, you would have closed your position using the buying price of 5641, having made a profit of £29.
It is possible to close a spread bet at any point even if the allotted time has not expired. By opting to cut your losses early, it is possible to limit the amount you lose on the trade although, of course, you risk missing out on the market swinging back in your favour.
Spread betting is a highly skilled venture and making money on trading on the FTSE takes skill and patience as well as many hours of research. Heavy losses are par for the course, even for the most adept traders and it is important to be able to balance your approach so that one unlucky day does not bankrupt you. As with any kind of speculation, the risks are high but the potential rewards are very significant. Whether this market is for you depends on whether your bank balance can absorb the losses that will inevitably occur.