Spread Betting AIM Stocks and Penny Stocks and More...

Q.69: I'm fairly new to investing and am trying to find a website that will allow me to go short on the AIM. Any ideas?

A: Most spread firms will let you take out shorts on the biggest AIM stocks - mainly the top 50. They will all only take bets over the phone rather than on the net though!

Finspreads quotes spread bets on UK stocks down to a market cap of £50 million although it will go lower if there is sufficient demand. Be warned however that illiquid stocks are prone to wild jumps and although stop losses are available to limit the risks, the prices on really small stocks could easily get past these.

Q.70: I have noticed some shares on AIM and SMALL CAP have a very wide SPREAD (about 50%)...

I have noticed some shares on AIM and SMALL CAP have a very wide SPREAD (about 50%) and some are only (about 2%) especially on 10-20p shares . Can you explain to me exactly what causes this or is it a combination of things?

A: Simple explanation, AIM stocks, are commonly referred to as penny stocks i.e., they are cheap in comparison to Mid Caps, Large Caps (i.e. FTSE listed securities)...etc, and since in a market place you need to have a buyer, a seller, and a middle man who are known as a Market Makers (MM), but are not liked by most as they have the power to dictate at what point they will buy and sell you the shares...

The MM`s don't want your shares hence the massive spreads. The reason why some AIM stocks have massive spreads is liquidity, in that the Market Makers do not believe they can easily sell the shares as quick, so if there is only a small percentage in free float then this becomes a problem for the MM to sell the shares on, so in order to buy your shares the market maker will usually issue insane spreads so to take the chance that they can sell them on, if you look at other AIM stocks that have good liquidity, you can see very small spreads, MXP,SLN,RXP, as the MM knows there is massive demand and so can easily buy and sell these on. So to recap, AIM shares often have a very thin market - sometimes no trades in a day, sometimes 4 or 5 trades. This means that there is almost always a wide spread between bid and offer prices.

The Market Makers make their money from the spread so it's better to deal in good liquid AIM stocks, as the spreads are very low compared to others, unless you really believe in the share you are buying and then you should be looking very long term, maybe 2-4 years, hopefully there will be more shares coming to the market to help liquidity, problem with ill liquid stocks is that they can be prone to wild fluctuations because the free float is small, IMO always look at the spread in every share.

By their very nature AIM shares are risky reward plays, some can be a ten bagger, or can go bust, so pay your money and take your chance, thorough research is what counts, look for potential growth, possible low forward PE less than 12, revenue increasing YOY, these are likely to become winners but as ever things change so there is no such things as a sure fire winner. If you don't like the risk/reward, my advice would be to stick to small caps that are listed and are growing in development areas, again the bigger picture needs looking into, as ever DYOR, never take on someone else tips without looking into your own work - it's your money! And keep in mind that AIM stocks tend to go down far more quickly than they rise!!

Q.71 CGT changes and AIM shares

As I understand it, the proposed changes to CGT will affect AIM shares by making gains from them taxable at the same rate as for other shares. If its right though, does this mean that in future AIM shares could be included within ISAs?

A: No AIM shares will not be allowed in ISAs etc... I had this confirmed officially.

Q.72: I've noted that spread betting firms will not offer guaranteed stop losses on certain companies like RPT. Why is that?

A: In my experience, guaranteed stop losses are usually only offered on liquid FTSE 100 stocks rather than small, volatile shares like RPT (as the risk is far larger for the latter). In addition, a guaranteed stop loss comes at an additional cost over and above a "normal" stop loss. Small illiquid stocks can be subject to strange market conditions that may see the market maker moving the bid and offer quite dramatically.

You could consider the guaranteed stop loss to be equivalent to buying a put option at a given price with an (indefinite?) expiry date, which is automatically exercised when "in the money".

Q.73: What is the cheapest way of holding a small cap (outside FTSE350) share through a spreadbet for a period of at least six months but possibly up to a couple of years? At the moment I am looking for Jarvis Securities, Lookers and Waterline Group.

A: IG Index has Jarvis plc and Lookers plc...

With a market Cap of only 11m and tiny volume you won't find Waterline with any spreadbetter.

I currently use IG Markets to hold my small cap stuff but I pay dealing commission and LIBOR + 2.5% to hold. However, I do get market spreads. Of course I also have to pay CGT though ;-(

IG cover all stocks down to £20M (I use them). MF Global (formerly Man financial) do shares down to £10M, though I don't use them.

Q.74: I've asked some questions regarding small caps to some of the big guns. Here are their responses:

A: Do you offer trading of small cap UK equities?

Finspreads: Yes we do as long as the company has a market capitalization of at least £50 million and is liquid enough for us to trade.

MFGlobalSpreads: We cater for UK Small cap equities. We can quote any share that has a market cap of £6m and above.

CityIndex: I am sorry to inform you that we do not trade in Small Cap Stocks. Any UK stocks that do not have a market capitalisation of £50 million or more are not available to trade in with our Spreadbetting product.

What would it cost to hold a long position in one of these for say 18 months? Please also suggest which of your products would enable me to do this most cost effectively? i.e. using rolling/futures bets.

Finspreads: You could hold a position in the longest term quarter contract which will get rolled over 3 times to total an 18 month trade. The only charges that are incurred is when the position is rolled over these 3 times, whereby you pay a reduced spread on the newly rolled position, which for FWY would be minimal.

MFGlobalSpreads: I recommend you trade the daily rolling cash share oppose to the future contract. The reason being the spread charge is only 0.2% going in and 0.2% closing out while a future bet the spread charge is 1% in and another 1% to close out. Also the margin on a daily rolling cash trade is half that of a future bet. In this case 12.5% on Fayrewood rolling and 30% on the qtly future bet.

Also, on the quarterly contracts you will have to incur roll over charges at expiry. The only difference being is with the two contracts is on the daily rolling contract you get closed out at the close each day and reopened for the following day so realizing the profit or loss for the day. I would like to add we do not charge an extra spread for rolling each day only once when you open and when you finally close your deal out yourself not in-between. All you do is pay the funding cost daily. An example of this is below.

The example below is based on buying a £100 per point at 90p.
You buy £100 (10000 shares) of Fayrewood at 90p = £9000 consideration.
Funding charge is 2.5% above base rate for the year. So £9000 x 7.5% = £675 per year so for 18 months it will be £1012.5

However, it is important to note if you bought the shares with a stock broker you would have to put up the whole £9000 while with us you would only need to put up 12.5% of that and use the rest to invest in something else or leave in a bank account. Also ours is a tax free product free from any stamp duty and capitail gains tax.

The spread charge will be current price 90p x 0.2% = 0.18 x stake (£100) = £18.

If you trade the future contract the spread charge will be £90 so as you can see its much more beneficial to trade the daily rolling contract.

What are your margin requirements on Small Cap stocks? If you could send me a list with all tradeable stocks that would be useful.

Finspreads: Finspreads: Unfortunately we cannot send you a list of each individual margin requirement as this would be a list of literally thousands. However, we can state that for FTSE 100, margins are usually between 5%-10%, FTSE 250 5%-50% and FTSE ex 350 20%-100%. For FWY, margin is 25%.

MFGlobalSpreads: The margin on small caps varies on market cap this can vary between 10% and up to as much as 60%

Andy 4) How do you hedge the underlying clients' position in the market?

Finspreads: If you buy a spread with us, we will go into the market and buy the stock, thereby hedging your position so that all we make is the spread.

MFGlobalSpreads: We hedge our shares in the cfd market.

Q.75: All these articles are nice to read. But how useful are they in practice? For example, you state that if the main trend is up, and the short term trend changes from down to up, then you should buy into the market. Go Long. I think most traders know that the "Trend is your friend", but how many know what is a trend, how to identify that, what is the time period to be considered?

A: In short words,

As long as stock makes higher tops and higher bottom, it is uptrend.

As long as stock makes lower tops and lower bottom, it is downtrend.

We can confirm it by drawing a trendline.

If you are day trader, then you can follow 5,10,15... minute time frame.

If you are a swing trader,then 30 min, 60 minute time frame is suitable.

If you are a short term investor, then go for daily time frame.

If you are a long term investor, then go for weekly time frame.

Time frame is a subjective aspect. Follow that time frame only which gives you maximum returns.

Good luck.

WANNA SCALP?

Ring, ring, ring, ring...

"Daily Dow please"

"Daily Dow 7500/1 sir"

"err yeah i'll buy all i can"

"thats done sir, all you can, buying daily dow 7501"

"err like cool, click"

ring ring ring ring.

"daily, hahahaha, hahahhaa, i'm sorry, doowWWW please, oh christ forgive me...eh hum Daily dow."

"daily dow, @ 11,650/1"

"ahhhh, hahaha, sell all i had"

"thats done sir all you had, sold daily dow 11,650"

"click"

hmmm nice scalp. must call again...

...Continues here - How the Dividends are Accounted for in Spread Betting (page 10)

Capital Spreads now not only offer 1 tick FTSE Spreads...
they are now also offering a range of small cap and AIM stocks
& if you want to set up an account with them via me they offer you a £70 bonus after 2 trades - and I'd get £20 too!
I quite like these win win things ...so click here if you want to open your account.

Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)

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