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Stock Indices

Posted By Robert On Wednesday, November 27th, 2013 With 0 Comments

Company share prices can be affected by a range of factors, to do with the company itself, the industry it operates in and the wider economy. While many private investors enjoy researching companies to understand their prospects, others find it complex and daunting.

Trading on a stock index is similar to trading on shares in that you are trading a basket of stocks rather than just one individual share. Betting on indices allows traders to take a view of broad economic trends, which can be easier to research and understand. It is also a way of exploiting international opportunities without the complexity and uncertainty of buying shares on overseas stock exchanges.

Spread betting provides traders with the option of betting on stock market indices such as the FTSE 100 and the Dow Jones. This is something that is impossible to do with traditional brokers.

There are many different market indices, covering individual countries, regions, sizes of company and industries. In Britain, the FTSE 100, which covers the country’s leading 100 shares, is the best known but there are several others, including the FTSE All-Share, the FTSE 250 (which covers 250 medium-sized firms), the techMARK 100 (corr) which covers technology-based businesses and the FTSE AIM All-Share Index of smaller companies.

As well as the familiar Dow Jones Industrial Average, the United States has over fifty other indices, covering companies of different sizes and operating in different industries. Dozens of other countries, from Argentina to Zimbabwe, have their own indices, as do regions such as Asia, Europe and Latin America. Popular ones include the Dax 30, which covers Germany’s biggest companies, the French CAC 40 and the Nikkei 225 of Japan’s leading stocks.

Spread betting makes it easy to bet on the rise and fall of domestic and international stock indices in a way that is not so easy (or transparent) when operating via a traditional stock brokerage share dealing account. You can bet on the rise and fall of the FTSE 100 and FTSE 250 indices, and you can bet on whether you think the German DAX and French CAC stock markets will rise or fall, not to mention being able to place bets on the American and other international stock indices.

Note that these markets may have different names from the names of the stock indices that you are used to, but it should be easy enough for you to figure out which indices are represented by the markets labelled UK 100 Rolling Daily and Wall Street Rolling Daily.

Stock indices may be classified in many ways, but it is simply a broad based index which represents and measures the performance of a basket of underlying stocks. In turn, this reflects investor sentiment on the state of the economy. Changes in the index reflect changes in the value of the stocks. Unlike an index tracking fund or Exchange Traded Fund (ETF) held in a traditional brokerage account, an index spread bet is entirely transparent in the way that a rise or fall generates a profit or loss – with no such thing as a ‘tracking error’. It is also just as easy to ‘go short’ by betting on a stock index falling as it is to ‘go long’ by betting on a stock index rising.

Stock indices tend to be higher priced than individual equities, e.g. the UK 100 index at 6000 compared with the price of Vodafone shares at 170 or Dixons Retail shares at 15, which means that the potential points moves (though not percentage moves) on stock indices are likely to be much greater and more costly in monetary terms if your bets move against you. On the other hand, these trades are likely to be more profitable more quickly in monetary terms, and it may be pretty implausible for a stock index to ever “go bust” taking all of your money with it.

Spread betting providers offer prices on a range of global stock market indices such as the UK 100, Wall Street and the DAX.

Spread betting on stock indices hold many advantages:

  • Trading indices allow you to gain an exposure to a large number of different shares in one single transaction. Therefore, as an investor, you can take a view on the direction of the entire index without knowing in detail or taking a view on the individual companies that make up that index.
  • Spread betting allows individuals to take short positions as well as long positions. Shorting indices can be very useful for those seeking to hedge an underlying portfolio of stocks should they anticipate a fall in the market.

If you’re considering betting on indices, it’s important that you understand what your chosen index covers and what factors might cause it to move in one direction or the other.

Betting on an index is exactly the same as betting on an individual share. You choose the index that you are interested in and bet on it to rise or fall, by pressing the ‘Buy’ or ‘Sell’ button, depending on your view of its prospects. As with other forms of spread betting, there are no dealing charges and your profits are free of tax.

If you are contemplating betting on indices, it is also important to be aware of the risks involved. Indices can be volatile and can move sharply and unpredictably in response to economic news or market sentiment. Falls and rises of several hundred points over a day are far from unknown so the potential for losses can be great.

For this reason it is extremely important to set stop losses when spread betting. This means specifying a lower limit to the index on which you are betting (or an upper limit if you are going short). Once that point is reached the bet is automatically closed, limiting your potential losses.You can set a stop loss very simply at the moment you place your bet.

Most providers offer quotes on all of the following stock indices:

US Markets
Wall Street
US S&P 500
US Tech 100
US Russell 2000

Europe
UK 100
Germany 30
France 40
EU Stocks 50
Swiss Index
Dutch 25

Global Indices
Japan 225

Most spread betting firms will trade quarterly and rolling bets on all of the indices above.

The minimum bet sizes are significantly smaller and the trading times are much longer than in the underlying markets. You can view minimum stakes and trading times in the market information sheets.

Example of a Stock Index trade:

Important information that you should be aware of before you trade:

  1. What is the ‘bet per’? (1 index point)
  2. What is the MR? (2%)
  3. What is the provider’s spread? (6)
  4. What is the dealing period? (07:00 – 21:15 until 21st March)

Opening a position:

The Wall Street Index for March is trading at a near term high. Your analysis shows that the market is overheated so you decide to sell the index in order to buy it back at a lower price some time in the near future.

The provider is quoting a two way price in Wall Street 30 Index for March:

Wall Street March: SELL 13556 – 13562 BUY

You sell £10 at 13556

For every point the index falls below 13556 you will make £10 until you either close out the position or it expires. Likewise, for every point the index rises above your entry level of 13556, you will lose £10.

The normal MR (Initial Margin Requirement)
is £10 x 13556 x 2% = £2711.

Closing a position:

You were correct with your analysis and the market falls.  The provider quotes a two way price in Wall Street March:

Wall Street March: SELL 13490 – 13496 BUY

You buy £10 at 13496 to close your bet.
Opening level: 13556
Closing level 13496
Difference 60

You bet £10 a point hence your profit is calculated below:
60 x £10 per point = £600 profit.

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