A: Yes, this is best explained by an example -:
If the daily bet on Barclays Bank shares was being quoted at 736-738 points, a bullish investor who thought that the price was going to rise would buy the spread at 738. Each point is defined as a one pence move in the share price, so a bet of £10 (1000p) a point would be the equivalent of buying 1,000 shares.
The logic behind £10 a point equating to 1,000 shares is that for each share one point means one penny. Therefore, there are 1,000 pennies in £10 and therefore through my calculations 1,000 pennies equals 1,000 shares.
If the price were to rise to 760-762, the position could be closed by selling the spread for £10 a point at 760. This would produce a profit of 22 points or £220.
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A: The answer sort of depends on your tax position.
The easiest way to short is with a spreadbet. It's cheap and cheerful on fast moving bigger stocks but, of course, these can also move quite quickly against you. On smaller illiquid stocks they are very expensive, unless of course you are a 40% tax payer...in which case the extra costs melt away.
CFD's are great if you're not worried about tax but the costs are high/er if you're trading smaller amounts.
Let me give you an example.
MPH is currently 150-152 in the market. If you bought a CFD with IG the costs are £10 each way (up to 10k worth) plus the spread of two points. 1000 shares would therefore cost you £40 to open. There is no stamp duty but there is tax to pay if CGT applies.
The spread on IG for MPH was, when open, a 4p spread. £10pp to open would cost you just under £40. There is no stamp duty and no tax to pay.
In this example the cost of the spreadbet and the CFD are broadly the same.
But if you had bought £50pp/5000 MPH, the CFD would cost £120 to open, the spreadbet £200.
One other option is to open a short account with TD Waterhouse. You trade on a T10, selling short and hoping to buy back within the period. It's a high risk strategy perhaps better suited to those with a big pot and some experience. I don't hold such an account.
I've said bought here when I meant sell but it works in either direction. The only thing to add is that when you are long a CFD/daily spreadbet you pay interest, when you are short you get paid interest.
Also, covered warrants are worth looking at. My put FTSE warrants have soared in value. I was prepared to lose what I'd put into them and looked on them as insurance together with a FTSE short I have and a number of other shorts. I especially wanted to protect the pension fund and so loaded up with quite a few warrants in there. It means in the pension I can hang onto some long-term positions for now without worrying too much short-term. I am no forecaster but I wonder whether the recent July blow off is better than a long bear market where shares creep down most days.
Note: I've only used MPH because it demonstrates the difference in prices and not because I'm suggesting anyone short it. Also, I've only shown the costs of opening a trade so you can see the hurdle, there is a deposit of between 5% and 25% (broadly) to be paid as well.
A: Yes, unless something happens, e.g. a positive trading statement which brings in buyers. The shorts then get worried and have to cover leading to a short squeeze taking the share price up a lot more than it may have gone if there had not been the forced buyers.
Shorting a heavily shorted stock is not without risk. E.g. ask anyone who has shorted uk builders before the raft of positive trading statements from Persimmon, Barret et al. All these shares have moved strongly up since these trading statements.
There is also the risk of sector rotation, so that buyers come out of shares seen in a positive light and start to come to shares that are depressed, particularly if they have a good dividend, and this too can cause heavily shorted shares to appreciate quickly.
There are likely other scenarios and of course in bear markets one often gets strong rallies that can lift the whole market and which can lead to short squeezes
A: I don't think trading the indices on a daily basis is important; it's whether you win overall that is decisive…
But, yes some people day-trade and are profitable although it is a real test of discipline. You are unlikely to come out on top without a strategy. The strategy will depend on how much time you want to spend in front of the screen and what your emotions are like with dealing with losses. Some strategies require you to lose most of your trades but when you win, it is big time and makes up for past losses. I can't handle that but some do. Other strategies are based on going with the breakout above or below a previous high or low. Even others are based on price action, trend and/or moving averages.
I know someone who only trades the first half hour of the FTSE and Dow open. Another chap I know trades the FTSE futures between 20:00 and 21:00. And another trader I have met has a 20 point check-list before he takes a trade and never loses more than £100 on a trade. Others trade the round numbers i.e. Dow 12000, FTSE 6000…etc
At the very least open a trading simulator account with a provider such as Tradindex and bet for demo money for six months (or even better do it for real but with the tiniest allowable stakes). If you haven't got the discipline to do that, it's unlikely you will have the discipline to day trade. Try trading the first half hour on a one min chart. Can you turn the screen off and walk away - every day - no 'just one more trade'. I find the first hour the easiest but nothing works in all markets. Finding a mentor also helps, otherwise be prepared to lose quite a bit of monies…
I will reiterate that you need to have a strategy and you need to have a plan for each trade. Ignore that advice and you're just rolling the dice.
A: City Index covers some iShares ETFs - there isn't so much a list of the EFTs on offer but if you call up the dealers and ask for a certain one they will look to creating a market for it.
A: I can think of 3 key differences offhand. There are many others.
We look into more detail into the differences between Spread Betting Versus Trading here.
A: Not really although in the UK they tend to sometimes refer to 'spread betting' as 'spread trading' (i.e. interchange the terms so as to remove the betting word connotation) which may obfuscate those who are not familiar with spread betting in the UK.
In reality though spread betting and spread trading are very different. Spread betting is not regulated by the exchange as such. It is more like the Forex - market. You are betting if a single market is moving up or down (same as buying or selling stocks for example).
Futures Spread trading is buying and selling contracts at the same time (for instance buying December wheat and selling July wheat) and to take advantage of all these combinations. For example, a spreader might take the risk of the difference in price between March wheat and July wheat, or the difference in price between December Kansas City wheat and December Chicago wheat.
The subject of this website is not spread trading but spread betting but you can read more information on spread trading here (pdf format) and here. (pdf format).
A: In November 2007, the activity of spread betting providers, like every financial institution in the UK came under a new European Directive - the Markets in Financial Instruments Directive (MIFID). This is the first time that European legislation covered commodity derivatives, credit derivatives and financial contracts for differences (which is what spread betting essentially is...)
Under the directive spread betting companies will be tied to offer best execution meaning that companies cannot make their own prices for shares. This means that the spread will be fixed and the price offered to you must be the best price possible in the underlying market. With this we will probably also see the end of skewed spreads when markets are moving in a particular direction. Also, it will be very difficult for spread betting companies to widen spreads to balance their book and they won't be able to move spreads if they have an opinion that the markets are likely to move in one direction.
Lastly, the new directive puts the onus on the provider to judge whether you are sufficiently experienced and understand what you are trading - this is the reason that almost all companies have launched trading academies. This implies that providers are likely to be more careful about their customers and what they allow them to trade - and you will have to prove to the provider that you are competent! So although the MIFID is primarily intended to protect the unwary it is also putting increasing pressure on spread betting companies which might in turn limit your choices.
As the MIFID directive applies across the whole of Europe, bookmakers are busy opening up branches to tap these markets (IG Index has just opened a branch in Spain and another in France for instance) - and note that binary betting does not fall under the Markets in Financial Instruments Directive.
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