Spread Betting The Indices Can Look A Little Like Bruce Forsyth's Audience Calling "Higher, Higher!"

Spread betting the indices can look a little like Bruce Forsyth's audience calling "Higher, higher!" or "Lower, lower!" when his giant playing cards are turned over. The online spreadbetting firms (of which there are a dozen or so) quote a price range (typically one point above and below the current actual FTSE Index level, and two points above/below the Dow). My task is to fathom which way the index will go and then stake an amount per point - winning (stake times points moved) if it goes my way and losing if it doesn't.

There are Financial Spread Betting companies around, such as IG Index, CMC Markets, Cantor Index, Tradindex, GFT UK, City Index...etc who cater for betting on both Indexes and selected shares. These generally work on a contract period, that is they are time limited.

So if in July you BUY the September FTSE 100 contract at £10 per point, and if left until expiry (or sold earlier if so chosen), for every point that the index rose above the level when you opened that position to the time when you sold (or the position expired), you would win £10. Similarly for every point the index fell, you would loose £10.

An interesting alternative is that you can also Sell to open and Buy to close �" in effect allowing you to sell and index or share in the belief that that index or share might fall in value, and re-purchase (Buy to Close) that position later and profit from declining prices/values. The broker will quote a spread price whenever you buy or sell. From that spread (commonly around 10 points), the broker will cover the betting levy. Thereafter any profits made are considered as having been made from a bet and are effectively tax free (the reverse also holds true for losses - e.g. you can't reclaim tax against losses).

Be aware that the price you are quoted by the contract broker at the time of opening or closing a position, will probably be at a premium. This is because effectively you are borrowing money in order to open the position and interest against such a loan will be payable. As an example, Buying a contract of one year duration against the FT100 at £10 per point when the index is 6500 is the same as a position with 6500*10 = £65,000 invested. As you don't actually make that payment, but instead back each point that the index moves, then interest against that effective loan will be due. If the current base rate is 6%, then interest of around £3900 (6% of £65,000)would be required in this example - which equates to a 390 point premium (at £10 per point bet). However the dividend yield is also considered and discounted from this. So if the current FT100 dividend yield is 2% p.a. , then a reduction of £65,000 * 2% = £1300 = 130 points would be made against that premium. So the final 1 year contract would probably be quoted at a level around 6500 390 - 130 = 6760.

Note however, if you had available funds of £10 for every Index point (e.g. 10*6500=£65,000) and deposited such into a bank account that paid an interest rate that matched the base rate at the time of opening a 1 year Buy contract against the FT100 when it stood at 6500 for a price of 6760, then the interest from the deposited funds over that year would in effect cancel the interest charge incorporated into the quoted price for the Index. In effect therefore you would have secured the position at an effective value of around the current index value less the dividend yield value (interest payable and interest receivable would cancel). At the close of that contract (one year later), the price quoted by the broker would be around the same as the current index value (no further interest payment required or benefit of dividend yield so no premium would be apparent). So overall, you still benefit from the dividend yield benefit overall - that is you bought in at an effective value of the Index less the dividend yield benefit and sold back (closed) the position at the index value.

You should be aware that such betting can be very volatile. As an example, if you place a £10 per point stake against a Buy to open FT100 position when the Index stands at say 6500, and the Index later fell to zero prior to your closing that position, then your loss would be 6500 * £10 = £65,000. Used wisely however, such spread betting can be exploited to assist a general investment strategy.

For further details of Spread Betting, a good starting point is http://www.financial-spread-betting.com who have comprehensive pages available on the Web that detail such.

Andy owns http://www.financial-spread-betting.com, a web site full of tips for spread traders. For more free information go to Spread Trading Guide Article Source: http://EzineArticles.com/?expert=Andy_Richardson