FTSE 250, FTSE 100 Tracker and how Dividends are accounted for

Q. I'm trying to understand why there can be a 30 point difference between the FTSE 100 Daily and the FTSE 100 Daily Future...

According to the company's dealing handbook, futures contracts reflect differences due to interest costs and foregone dividends. But the interest for less than a day is negligible and, in fact, no FTSE 100 companies go ex-dividend on some days so I'd expect the prices to be similar?

A: The FTSE 100 Daily Futures Contract is based on the most liquid future contract, but is a daily position. So, while the price is calculated to factor in the interest and dividends involved in carrying the underlying until the expiry of the March contract (at the moment), the spread is the size of a daily spread, and the position will expire at the end of the day.

Q. I've just bought a FTSE 250 daily bet at 3 pounds per point. I can't however understand why I'm sitting on a £200 loss just immediately after opening the bet?? I thought the spread would be tiny in relation to the cash index considering this is a daily bet?

A: The spread on the FTSE 250 Rolling Daily is about 40 and the reason it is so wider than the FTSE 100 Rolling Daily is due to factors such as the value of the FTSE 250 index being much greater and it is also a more volatile market. It is just less than 3% and differs from the FTSE 100 because there are no futures contracts in the market. This is also increased by 26 points when a position with a guaranteed stop loss is used, hence explaining the deficit when initially opening a position [(40+26)*3 = £198].

Q. Am I right in thinking that buying a spread in, say, the FTSE 100 is similar to a tracker...

Am I right in thinking that buying a spread in, say, the FTSE 100 is similar to a tracker I could buy from, say, L&G, in the same index (apart from charges and spreads)? If so, then can you assess the relationship between points on a spread bet to, say, £1000 in a tracker?

A: Yes, but the charges and spreads is a big difference. If all you want is a long term tracker then spread betting the FTSE 100 is unlikely to be the best idea.

With the FTSE around 6100, each £1 spreadbet is the same as buying £6,100 in a tracker. i.e. if the FTSE rose 100 points then (before charges and spreads) £6,100 in a tracker would be worth £6,200 (a £100 gain) and the 100 point gain on the spread bet would be worth £100.

Working the other way, £1,000 in a tracker is worth (1000/6100) about 16.4p as a spread bet. i.e. a 6100 point rise in the FTSE (for ease of the mathematics) would mean a £1,000 profit in the tracker and a (6100*0.164) £1,000 gain on the spread bet.

Q. About the FTSE can't you simply go long at £1 a point and leave the position open - eventually its bound to go over 6000 isn't it!?

Tom here from Ireland. I don't use stop losses but then I am not day trading. I am prepared to wait a day, a week a month or a year to make a profit I am currently Long £30 a point on the FTSE at 5825 and will not be subject to a margin call unless the FTSE falls below 4250. I will add as appropriate up to a total of £50pp. I only place a trade on instruments I understand inside out - the FTSE in this case and if I have any doubt that the trade won't eventually make me money I don't place the trade.

The initial margin requirement for £30pp on the FTSE is £6,000 (30 x £200). I attract no further margin requirement unless the FTSE falls to 4250 (Thats with £50pp). I trade March contract which expire 21 Mar. If the FTSE rises 50 points to 5875 by 21st March (I opened at an average of 5825 around 1 Feb) I profit by £1500. £1500 return on £6000 in two months equates to £9000 or a return of 150%pa. To me the "risk" is worth taking to attract that level of return.

Having said this spread betting need not be high risk - in fact it can be no risk, with this rather simple technique which I shall explain here:

It's based on two hard facts. One: stock markets rise over time - a chart of the FTSE since it began shows a parabolic rising line with the bear markets appearing as short blips. A long position entered at any time will eventually move into profit, whereas a short position may never come back to you. And two: individual stocks can go bust and become worthless, but an index never can - dogs of the FTSE 100 index get replaced periodically by better performers. Therefore, a long position on an index is the safest bet you can make, so long as you have the funds in the account to cover a potentially large move against you before it comes good. For a £1 bet on the FTSE account funds of £5k will secure it.

A: Not trying to be condescending but by implication Tom, you are willing to bet up to and beyond 47 grand [(5825-4250)*30] that your bet (it's a bet let's face it) is correct. I don't consider that more prudent than active trading with stops and reassessments. Us day traders will step back and review after 20, 50, 100 points. You are going to stick it out and leverage up for 1600 FTSE points. In 1929 it took well into the 1950's to hit the same levels. Not saying we are there now, but there are no certain bets...

As for the risk-free technique of a £1 bet on the FTSE account I think you are missing the point, which is had you of invested in 2000 at a reasonable level of 6000 points (remember the high was 6700) for that period, you would have caught the fall and were you a greedy investor wanting to cash in at say 6500, you would have had to wait almost 6 years till your investment made a profit, this forgetting about the interest your spread betting company charges while if you had your cash in a bank, and made an average of say 5% per annum, the index would have to be 300 points higher each year to make a profit - in other words the cash in the bank would have made the equivalent of 7800 by today, forgetting about compounding.

Longer term trading or investing has to take into account inflation. Short term trading doesn't. I'm still amazed how some people who work in the city still don't understand the ravages of inflation.

It is false to assume that spread betting is easy money, better to have clear entry and exit strategy and look into making modest profits (perhaps 50 points), and know when to cash out.

Q.74: Mostly spreadbetting is for speculating or hedging and trackers are for investing...

When you say 'hedging' is that like a short term bet against losses elsewhere, by betting on the opposite? e.g. if I held a tracker, and thought the market might drop, I could sell some via the spreadbet system, rather than cash in the tracker. Like hedging bets?

A: Sort of yes. Although a direct offset like that (holding a FTSE tracker whilst short selling a FTSE spreadbet) might not make too much sense - why not just sell a percentage of your FTSE tracker instead? (although there can be a good reason - see below) Hedging in this sense I'd take more to mean that if you hold a selected basket of stocks, you might short sell the FTSE - so that if the market in general goes down you'll be covered - but if your stocks outperformed the market even when trending downwards then you still benefit (another way to short-sell is using options).

I personally think that spreadbetting can have a place as an investment tool as well as for 'speculation'.

You certainly need to be aware of the difference in charges but a lot of it also comes down to mindset. If you can convince yourself that holding a spreadbet is just another way of buying the shares then you can use it in a more classical investment rather than speculation.

Certainly spreadbet charges are (generally) higher and you pay interest over time, but there are other counteracting benefits.

  1. You can cost effectively take much smaller positions (down to perhaps £200 with some companies) with spreadbets than with conventional share deals.
  2. You can more easily leverage (careful) if you wish to.
  3. You avoid tax (as legislation currently stands) on gains.
  4. You DO still get the benefit of dividends.
  5. In certain circumstances you can use spread betting to defer CGT with your 'ordinary' share positions.

Imagine you want to sell some shares because you think they are now pricey. But you've used up your CGT allowance for the year. You can -:

  1. Sell them anyway and pay CGT on your gains.
  2. Delay selling them until the next tax year, but run the risk that the price will fall in the meantime.
  3. Short sell via a spread bet so that you have a net zero exposure. Then coming the next tax year you can sell the shares and close the spread bet, knowing that you've locked in your profit at the level you wanted to in the first place.

I personally think that great care is needed with the "mindset" side of using spreadbets, but IF you get that cracked they are a useful additional option to have in your toolkit.

Q. 'You DO still get the benefit of dividends.' With a FTSE Bet?

A: It's worth recapping how dividends are applied to individual share spread bets first.

If a company X currently has a mid price of 100, a futures spread bet may have a mid price of 105 (the extra 5 being effectively the interest charge you pay on the spread bet) .

If company Y is also currently at a mid price of 100, but is due to yield a 2p dividend during the period covered by the spread bet the spread bet will then be 103 (105 less the 2p dividend) i.e. you effectively buy the shares "ex-dividend" and pay the ex-dividend price.

It's quite easy to see this factor in play with individual shares - whereas the share will drop by 2p on X-dividend day, the spreadbet will not move.

Exactly the same approach is taken for Indices - it is, however, much less easy to see in action - A share will typically yield 1-2% twice a year but an index is more likely to yield a fraction of a percent up to 52 times per year.

How do we then know that what I've said actually does happen for index bets?

Firstly IG Index appear to confirm this in their dealing handbook (although I'd stress that if you want to be sure you should confirm directly with you spread betting provider).

Secondly it effectively 'has to be' true. If the index bets did not include dividends there would be an effective bias that would make shorting the index via spread betting more attractive than longing it.

In fact it might even create an arbitrage opportunity to buy the underlying index and receive the dividend whilst simultaneously shorting the index spread bet and gaining advantage of the price falls that result from shares going x-Dividend. It would probably be a pretty thin arbitrage, but I don't think market forces would allow such an inefficiency to exist.

FWIW, though I think generally investors would do well to steer clear of indices because they are much harder to gain any 'edge' on than individual shares - it is easy however to con yourself into thinking you what's what (I seem to recall that a large proportion of people who lose whilst spreadbetting do so because they play the indices).

The only rational reasons I can see to 'play' the indices are:

  1. Because you want to track performance of the market overtime (i.e. you want to invest in "the market" but don't want to do difficult & risky stuff like stock picking or
  2. To hedge other positions.

Q. Suppose I short index spread bets using the rolling daily - I presume I would also be paying dividend...is there anyway of knowing how much dividends will be paid on a certain day?

A: It would be possible to determine how much you would be paying by gaining information from the exchange however companies tend to change their dividends so it would not to easy to predict the amount well in advance but generally within a few days. Your best sources are Reuters, Bloomberg, financial websites and the FT. For instance click here for the direct link to the Reuters feed. Alternatively, pick up the phone and ring the desk - your spread betting company will have this information.

 ...Continues here - Spreadbet Charges and Funding Costs

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