Betting on Stock Prices: Spread Betting Example
A spread bet on a stock is a bet on the future movement of an underlying share. In a nutshell if you believe the stock’s price is going to rise you place a buy bet, if you believe the share price is going to fall you place a sell bet. Unlike ordinary share trading you can benefit from falling as well as rising shares or other financial instruments.
Let’s take an example:
Kingfisher PLC stock is currently trading at 216.90 – 217.30
1. Trader X is of the opinion that Kingfisher PLC stock is going to rise so places a buy bet at 217.30 for ?50 a point.
2. Trader Y has the opposite view and believes that Kingfisher PLC stock is looking weak and thus places a sell bet at 216.90 for ?50 a point.
Kingfisher PLC stock rises to 230.50 – 230.90.
-> Trader X’s prediction has been proven correct since Kingfisher PLC has risen and the investor chooses to close his position with a sell bet at 230.50 booking a ?660 profit (13.2 points x ?50) in the process.
-> Trader Y decides to cut his losses and closes his position at 230.50 and incurs a ?680 loss (13.6 points x ?50).
Kingfisher PLC stock falls to 210.00 – 210.40.
-> Trader X’s prediction was wrong so he decides to close his position by placing a sell bet at 210.00 incurring a loss of ?365 (7.3 x ?50).
-> Trader Y’s prediction is now in profit and he decides to close his spreadbet by placing a buy bet at 210.40 making a profit of ?325 (6.5 x ?50).
Tips and Strategies
Financial spread betting on a share price is relatively simple. The benefits of spread betting rather than buying the shares through a more traditional method is of course a quicker turn around time than traditional share brokerage, the ability to take advantage of the leverage supplied to you by the spread betting companies, and of course the ability to bet on both a share rise, and a share fall. It is important to understand the risks that are carried when you bet with leverage.
You should always be looking for the smallest spread in any spread bet you make. For this reason, If you are looking to make a longer term investment in a growing company, it would be well worth looking in to an execution only stock broker where you can purchase the shares at a reasonable price. If spread betting is the way forward, it’s common for spread bettors to have multiple accounts with different companies to take advantage of the best possible spread.
Spread Betting on stocks may also be a good option for those whose who can spot an ailing company, perhaps one with massive debt problems or an outdated business model. Spread betting firms will pay you per pence movement right down to 0p if the company becomes insolvent and goes into administration, although it may take a little while for confirmation of this while the company is put through the administrators.
Spread Betting Stocks And Shares Tips
As spread betting is a leveraged product, just a ?1 bet per point is the same as buying 100 shares, ?10 per point is the same as buying 1000 shared
and so on. It’s important to understand this, and to understand the size of your position and your possible exposure when making a spread bet on stock as shares.
Time your trade. As spread betting is relatively short-medium turn compared to other investments, get to know the share and identify your entry price. Don’t rush into buying any old share the moment you open an account. Even the best shares go up and down, getting in while the share is at a low can make you some good money.
- Don’t Be Afraid To Short
One of the advantages of spread betting is the ability to short (sell, as well as buy). Some first time spread bettors don’t feel comfortable with the idea of shorting, or the idea of selling just seems unnatural. Some good money can be made out of shorting if done correctly.
Be aware of early morning trades, or at least the first few minutes of market opening. While buyers and sellers get their orders in spreads will be at their widest, but should correct themselves shortly afterwards. It is also important to bear this in mind if you have a stop loss in place as it’s possible for your position to be closed out automatically by this widening of spreads. It’s always good to check your spreads and adjust your stop losses accordingly.
There are plenty of online spread betting companies, and it’s alway good to have a couple of accounts to take advantage of favourable spreads. Shop around, and get the best spread possible. The smaller the spread, the more money you make.
- Watch Out For AIM Listed Shares
AIM listed shares can be quite volatile due to their nature (these are often start up companies or companies yet to go into profit), that said, AIM listed companies offer great potential.
- Don’t Pay Too Much Attention To Bulletin Boards
You can find lots of forums, such as those on iii.co.uk or advfn.com where ‘investors’ hang out and talk about the latest hot stocks. Be careful on these peoples advice, always trade off your own research or ‘DYOR’ (Do Your Own Research) as you’ll often seen posters write. Be aware of ‘rampers’ and ‘derampers’ – people trying to encourage movement in their favour. By all means use these forums as an aid to finding new companies, but don’t ever trade off the advice of someone you’ve never met.
On ex-dividend days, your chosen stock will usually go down by the amount of the dividend. Shares will often rise back up to where it was before the ex-dividend, but it’s important to remember this when spread betting, and ensure your bets are not closed out by this drop. You can usually find out a companies ex-dividend days by checking their investor relations information.
- Use Your Tools To Limit Losses and Take Your Profit
As with any trade it’s always good to have a clear plan of what price you want to buy in at, and what price you wish to exit at, and which price you wish to profit at. These can pretty much all be automated, so take advantage of the tools to hand.