FTSE Spread Bet vs FTSE Tracker

Spread bets on stock indexes are the most active spread bets that are traded. They include all the global indices such as the FTSE 100, German Dax, Japanese Nikkei and the three big US indexes, Dow Jones, S&P 500 and the Nasdaq 100.

There is a huge demand for spreadbetting and it also allows for a global perspective when it comes to spread betting on indices around the world.' So for instance you could spread bet on the movement on the MSCI Far East ex-Japan index, rather than take a punt on a few isolated and illiquid stocks on the local exchange.

You can see why the idea has taken root. Try investing £10,000 in a FTSE spread-bet with CMC Markets or IG Index, and contrast it with the same amount invested in a FTSE tracker. The spread-betters will use your initial stake as a 1 per cent deposit to open a position that is 100 times bigger. In other words, your £10,000 spread bet gives you £1m worth of exposure to the FTSE 100.

Suppose the FTSE 100 fell from 4800 to 4752. Those 48 points equate to a 1 per cent drop. Your exposure to the index is £1m, 1 per cent of which is £10,000. That means a 48-point fall in the FTSE would lose you your entire investment. On the plus side, a 48-point rise would double your money. But a 96-point fall over a few days would leave you owing the spread-better £20,000. The same principle applies to CFDs.


By contrast, a 1 per cent rise or fall in the FTSE would leave your index tracker fund just £100 better or worse off. You are far less likely to lose your head in such circumstances.

But it's not all bad news. First, spread-bets on individual shares tend to have less extreme financial leverage than that offered on indices like the FTSE 100.

Second, you are in control of the risks you take. You always know the margin (also called gearing or leverage). Therefore, you can calculate the exposure you want to commit to in advance. So choice is not between £10,000 in a FTSE tracker or £10,000 on a spread bet that will give you exposure of £1m. Your choice is between £10,000 in a tracker and £100 on a spread bet, with the remaining £9,900 in a high-interest savings account.

This second option gives you the same exposure to the FTSE as investing all your money in a tracker, and you get the certain return of interest on that £9,900. However, it is not the free lunch it may seem. Remember that your deposit (in this case £100) is used to gear up the total investment. But you pay for that privilege. Spread-betting firms will charge you interest on any position left open overnight. For smaller clients, this will usually be 2 or 3 basis points above UK interest rates.

All stock index spread bets work the same way. The spread better is given a two way price and he or she can effectively bet on the perceived future direction, long or short with an associated stake per point. A list of index markets on which you can typically spread bet on are included below -:

FTSE 100 futures (UK)
Wall Street Index futures (US)
S&P 500 (US)
Nikkei 225 Index (Japan)
Hang Send Index (Hong Kong)
DAX 30 Index (Germany)
CAC 40 Index (France)
MIB 30 Index (Spain)
SMI Index (Swiss)
OMX 30 Index (Swiss)
Dow Jones Euro STOXX 50 futures (European)
FTX futures (Russian)
HTX futures (Hungarian)
ATX futures (Austrian)
BEL20 Index (Belgium)
SPI 200 (Australia)

Other possible ways to buy the FTSE index apart from spread betting FTSE futures include index trackers (OEICS), FTSE Future, FTSE 100 Options, buying an ETF (say iShares FTSE 100 (ISF.L)), options, and CFDs. And, of course, you could go the unconventional route of buying every share in the FTSE 100!

Where One Leads : Many experts believe that betting on other world markets has one further and very major benefit. It is this: The American and Japanese stock markets are very much the barometer of the world economy. Quite often trends that start in the American or Japanese stock markets also occur in the UK market, but a little later. So, active involvement with foreign markets can also help you refine your betting strategy on the UK market.

>> Technical Analysis applied to Indices

The content of this site is copyright 2016 Financial Spread Betting Ltd. Please contact us if you wish to reproduce any of it.