Betting on Stock Market Indices

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Tips for Spread betting the Indices

1. Stock Index Futures Contracts came to the UK in 1982, having proved successful in North America.
2. An index value is created by compiling a number of stock prices into one total value, and expressing the value against a base value from a specific date, thus allowing investors to easily follow the performance of certain groups of stocks (usually a certain number of leading stocks from a given stock market).
3. Index spread betting is hugely popular with TradIndex estimating that 50% of the trading volume they see going on indices.
4. Most index spread bets are not on a stock market index itself, but on the futures contract. This is not only convenient in that it provides a standard ready-made markets that's the same for everyone across the industry but the spread betting providers can also price a market faster and with greater confidence if they can take the quotes directly from the exchange. Lastly, and perhaps more importantly this provides the spread betting firms with a means of hedging in that they can trade the futures contract for their own account if their liabilities move outside acceptable limits. Indeed, most spread bets actually end up aggregated and hedged directly into the futures market.
5. Bets on indices appeal to speculators, technical traders who watch technical charts and to an increasing number of retail investors who believe they can see a big market move but do not want to disturb their underlying share portfolio.
6. Trading indices may be a safer strategy if you're looking into emerging markets as it is easier to take a decision on where a whole market is going than an individual stock. This is because if you're looking overseas picking out individual stocks in illiquid markets can be dangerous...
7. Plus, and this is a critical point, the spread on the main indices tend to be lower than on any other markets. Capital Spreads, for instance only charges a 1 point on the FTSE Rolling Daily.
8. The majority of bets are placed on the FTSE 100 index and the Dow Jones.
9. Other financial indices that can be traded include the FTSE 100, Dow Jones, S&P 500 Index, Nasdaq, DAX, CAC40, MIB30, Nikkei 225 and about every major index that you can think of. A number of the firms use colloquial terms for some of the indices, for instance calling the Dow Jones Industrials 'New York' or the DAX 'Germany'.
10. Not only that but the indices themselves can be broken into parts - for instance the FTSE can be traded in the following: FTSE100, Daily FTSE Index, Daily FTSE Futures, FTSE 250 and so on. The FTSE 100 comprises the largest 100 companies quoted on the London Stock Exchange, likewise the Footsie 250 is the top 250 companies and not 100.
11. Contracts are available daily, weekly, monthly or the standard 3-month contracts (note that not all spread betting providers offer weekly and monthly products). Some others also offer a rolling product.

Daily Index Bets (aka as Futures or Daily Trades/Daily Cash Bets)

1. The Daily Futures can only be kept open for one day (unless you open a Rolling Daily).
2. Daily Futures (aka as daily trades) have the smallest spread but expire at the end of the trading session (i.e. have a lifetime of one trading day).
3. Note that the Rolling Daily market may not be 100% in line with the Cash market. Cash indices tend to lag behind slightly, particularly when trading is beginning for the day, as they are simply a reflection of the prices of the components of which they consist - if half of the components of the Dow Jones have not traded ten minutes after the opening of the trading day, the index is unlikely to reflect the true current situation. The futures will give a far better picture in such a scenario, and for this reason, we use a variety of sources in order to price our Daily Index bets.
4. FTSE - market is quoted 24 hours a day, but the official quote is from 8.00 am right up to the close 4.30 pm. If you allow the spread bet to expire, i.e. hold the position until 4.30 pm for the daily FTSE, or 9.00pm for the Daily Dow you do not pay any spread, the deal is settled at the exact closing price down to the decimal point.
5. When trading daily futures make sure to take account of the time differences - being in the UK trading the FTSE wouldn't be a problem and I can trade the Dow as it opens mid-afternoon and closes at night, but trading the Nikkei on a daily basis is difficult due to the great time difference between the UK and Japan.
6. Those in the know often advise people new to the market to avoid daily bets in the indices, simply because it is difficult for private traders to beat the professionals at their own game. It is a generally accepted view that taking a longer term view increases your chances of making money from your initial bet (although this strategy tends to increase traders' costs).
7. Rolling cash bets are an extension of the daily cash bet - this is a cash bet that is carried over from one day to the next for as long as the spread better wants subject to paying the financing costs associated with it.

Monthly Contracts

1. Contract Expiries
• FTSE 100 Future LIFFE London - March, June, September, December
  Expires the 3rd of February of the contract month, so for December it would be the 3rd Friday in December
• Dow Jones Index Future CBOT- Chicago - March, June, September, December
  Expires the 3rd of February of the contract month, so for December it would be the 3rd Friday in December
2. It's very important to understand that betting on a futures contract is not the same as betting on the underlying market, though the two are obviously linked.
• All major indices quoted by a spread betting firm have a Futures market related to them (i.e. the FTSE 100 has the LIFFE FTSE Futures market). A futures contract, a spread bet on it, will often stand at a premium to the cash market, and the longer the life of the contract, the greater the premium is likely to be. The yield on shares is lower than the interest paid on bank deposits. So an investor would, if the futures price were the same as the cash price, get a higher return by buying futures on margin, and then banking the rest of his cash, than he would if he simply used all of his money to buy shares. The premium cancels out this effect. It also takes into account of the fact that someone trading futures receives no dividend. So don't consider this premium as some kind of market prediction that share prices will rise - it is simply a mechanical adjustment to today's share prices. This Adjustment is called the 'Fair Value'.
• The FTSE 100 index, for example, has a hundred separate components and will move up or down more slowly than the futures contract, which is a single market that can factor in developments more quickly.
• Speculative money, and all the excesses that go with it, drive futures markets so the prices can be much more volatile than those in the underlying market.
3. The Futures market is a market like any other, driven by supply and demand and a contract will often trade at a premium several points above or below the fair-value level.
4. A few index bets are not based directly on any futures contract, the daily FTSE and Wall Street markets being cases in point.
5. Generally it is more expensive to bet when the underlying market is closed. For example, the quarterly FTSE 100 futures spread may increase from 8 points to 10 points after 4.30pm. Outside of normal market hours, a spread betting company acts more like a bookmaker, essentially making up the stock index futures prices based on what the US markets are doing and the business on their books. Those who trade at such times must inevitably take on board a certain level of risk.
6. Just because you hold a December contract does not mean that you have to wait until December to close your bet, you can close it out at any time, say in the first week of December. It is also a good idea not to run the contract right up until the last day as very large swings can occur as large futures players close out their trades. This is known as triple witching and the effect starts the last few days before the contract expires.
7. Futures based bets are a logical choice for most investors intent on using spread betting to boost their return and/or for hedging purposes. You do not have the time pressure that a daily cash bet entails. Provided you have a bit of nerve and enough leeway in your account, you can stand a short-term loss if you are convinced your judgement is correct.

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