Tips and Strategies for Spread Betting on Shares
- Share prices are displayed in 'pence' so if a share is trading at £4.23 it would be shown as '423' with each 'point' movement being the equivalent to a 'penny' movement.
- The spread on a particular share will always be wider than the gap between the bid price and offer price for that share on the stock market.
- Spread betting on shares is generally not suitable if you wish to hold the shares for an extended period of time. This is because it gets more and more costly when trades have to be rolled over and spread betting does not provide any ownership of the share (no dividends...etc). So although it doesn't cost much to hold a spread bet position for a few days/weeks, costs start to mount up if holding a share for over a year due to daily rollover charges. Having said that it is quite cost-effective to hold a share for over 6 months these days due to the fall in interest rates.
- Pay attention to deposit margins. Sometimes the deposit requirement on a share is very high, so always compare a couple of shares you are interested in and spread bet those with the lowest deposit requirements. An obscure smallcap can easily eat enough deposit to bet on several FTSE 100 companies. I had a look at my IG Index account and my biggest deposit requirement at the moment is 75% on RGS. Compare that to 5% on something like VOD, that's 15 times the share value you could bet on with the same funds. So it definitively pays to look at deposit variations more closely if funding is limited. Usual caveat applies: I'd still recommend equity leverage be backed by non-equity assets (cash, property, loans, etc.). If starting out funding for one share is sufficient to start with. You either hold because it makes money or you sell and buy another. What's really nice is that as you move your stop up, more funding becomes available.
- Always use stop loss orders and be prepared should the trade move against you. Plan what to do before it happens, because it is guaranteed. Hence, why it is important to fix a maximum normal trade size. 5% means (obviously) that you need to be wrong 20 times on the run to lose all your money.
- If you are just starting out it is advisable that you start with FTSE 100 highly liquid stocks before moving into more volatile forms of trading. Note that in general small caps tend to be more volatile than blue chips FTSE shares and some stocks can be more volatile than others.
- Less liquid securities also attract wider spreads so it makes sense to stick to the main FTSE 100 listed companies if you're constantly trading in and out of a company. If you are taking a view over a longer term period then the spread will make less impact.
- Beware large minimum stops required on shares (as opposed to indexes). e.g. 10% of the share price. If you want to trade short term and get around this, use the facility to automatically trigger open a new position in the opposite direction at a price lower than 10% movement in the price. This starts getting a tad complicated but means you can protect youself again a sudden large price movement with an opposing bet.
- Most spread betting providers will allow you to bet in your preferred currency (the currency you chose when opening the account) which takes the exchange rate problems out of the way. Your transactions are then made in that currency, so you can avoid running any currency risk. There is no currency risk as you are betting for example X number of uk pounds on Google's stock price moving Y number of US cents.
- It is often said that boring companies are more likely to deliver than companies in high growth exciting sectors like technology companies. It is the same for trading - you should look for boring trades as opposed to exciting ones. If a stock is moving in a sideway range with no real direction look to make an entry (with a stop loss) as soon as this established range breaks out.
- Keep in mind that shares fall faster going DOWN and go UP slower. This is because people panic and sell in mass and this creates a sudden drop in the market when their positions are pulled. People are more cautious when they buy than when they sell and this is why markets creep up slower.
- Spread betting also offers a practical way of hedging a share portfolio - you can do this by continuing holding the shares and in the same instance open a compensating shorts position with a spread bet, the dealing costs are lower than selling the shares and there's no CGT liability. Most people do not hedge and not without reason, let's face it in recent years there's been no point but if we do experience a genuine bear market like the one the Japanese had to endure for a decade, perhaps attitudes to hedging will change.
- Stocks can sometimes move a lot on market news. A company on the receiving end of takeover speculation will almost always attract more buyers. Sometimes investors will try to take a view ahead of corporate results, anticipating good or bad figures. Sometimes a good story will provoke interest. Boardroom changes, a new product launch, a shift in strategic direction, or an upgrade or downgrade by a broker can all offer encouragement to speculators.
- Don't underestimate sentiment. Markets are forward looking and the share price can be a reflection of what the market thinks will happen in the future which means that most of the news may be already priced in the share price. For instance, in some cases a company may release upbeat results but the share price may still drift down as the news may had already been priced in by a run of the shares over the previous weeks. Likewise, a company may issue a bad update but its share price may still edge up since the market is relieved that all bad news is out of the way and that management has announced steps to address the problems. Sentiment alone can drive a company's share price considerably away from the 'fair value'
- Bad times to trade (UK); early in the morning around 8.00 am to 8.45 the market can be thin so prices could be out of line. Also, take care after 4.00 pm for the same reasons. While lunch time was also a bad time some years ago you will find that this does not matter as much anymore but is still worth considering.
- Trends have a tendency of running too far up or down. It is best to exit long trades when selling into a crowd just as upward price action is approaching key resistance. Only sit through a retracement IF your trade plan and time is targeting several price waves. Retracements happen even in the strongest trends as investors move in to liquidate profits or the company stalls due to excessive expectations. If you expect a larger move and a consolidation range forms after an initial move up, place a stop just below the range in case it moves against you. However, you should move your stop the moment the consolidation is broken to the upside.
- Note that in general the fundamentals play a more important role the longer the holding period, while technical analysis is more relevant for shorter timeframes. This is because the underlying indicators are less important than group psychology, as market sentiment drives shares prices more than the 'facts' of a companies balance sheet. However, if trading over shorter periods do consider fundamental news that might have an abnormal effect on the share price divergence like trading results (is the company beating analysts expectations or not?) or director buying/selling. Longer term investors should be more interested in a company's cashflow and consistency on income and dividend payments.
- A few comments on trading updates... Do follow quarterly/yearly financial company reports; always know the reporting dates well in advance. Notice how the the price reacts to the announcement of a reporting date. Look at how the price changes in the run up to the reporting date but don't assume reports' contents drive buying and selling in a 'logical' way. If the reaction to a report is 'strange', hang back and wait and see how it develops - there's always another opportunity which is less ambiguous.
- Before investing in a stock do check that the underlying sector is supporting the movement of the stock. There is no point in fighting a losing battle if the index is retracing and you are expecting a major rally on your share price.
- Only buy stocks that are acting stronger than the parent index and never buy stocks because they look cheap on the assumption that they will have to recover one day.
- Steer clear of companies with a lot of debt or are trading badly (unless you are considering shorting them through spread betting) - these are probably the worst possible shares to buy using gearing as the market tends to run somewhat in fear of debt ridden companies that offer the potential for total loss. Be wary if every analyst in the City is talking about the stock or if your friends are are talking about the fortunes to be made by owning the stock... On the other hand do not completely exclude companies with ridiculously cheap valuations or high degree of pessimism or even hatred surrounding the shares as these shares are more likely to beat expectations especially when the price action has turned up following a long period of steady decline.
- Suppose that after having made your research you have identified 5 or 6 shares you particularly like. How much should you put into each one? Should you go for investing an equal sum into each or should you put the bulk into the one you like the most and only a minority into each of the others? Although your instinct will probably urge you to favour the stock which you believe is likely to bring the greatest returns, I can tell you from first-hand experience that it is safer to equalise the weighting by value, as often I've ended surprised by which ones of my picks deliver the best profit.
- It is prudent to buy tranches of shares in small quantities. Also, don't risk too much on one company but spread your risks among some 10 shares and sectors. Sure this limits your gains but you have to be realistic and trade within your capability zone. Once you gain experience and start making money consistently you can start increasing the size of your positions but you should do this gradually - otherwise you're just gambling and asking for trouble.
- Work out your normal trade 'size/position' upfront and stick to it. This should equate to the maximum % of your total trading capital you are prepared to commit/lose in any trade. Say 3 or 5% for instance. If you divide this (your trade size) by the number of spread points to your stop position this will provide you with your normal trade stake. e.g. £1000 capital sum to trade using a 5% trade size = £50 per trade. If you use a 50 point stop then you would place a bet at £1 per point. Your total downside would then be limited to £50 or 5% maximum if the market goes against you. If you use larger stops then you need a smaller £ per point.
- Past analysis has taught me that the overall position of the market overrides the performance of individual stocks. If the market has had a good run, several weeks of advances, the odds of it retreating increase and such a retreat will pull down most stocks. So a good tactic is to wait for a pull back. But I am fallable, I can get caught up the moment. I screwed up recently by believing the USA market would, based on fabulous earnings, continue to move ahead. It didn't and I have had my head handed to me and worse I didn’t have the capital to pick at the low prices we saw last week since I allocate an amount to equities and that is already in the market.
>> Spread Betting on Shares: Good to Know
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