Spread Betting Shares | Shares Betting
Trading in Individual shares must be the most favoured trading product available. It hasn’t been around that long, seven years or so when IG Index realised that there was a great deal of demand for trading in Shares within the FTSE100.
The shares that you can now trade are vast and varied. All the FTSE100/250 is there, most major and some minor US shares including NASDAQ and Tech Shares. The good news about being able to trade individual shares is that they are no different to trading the Indices. The gearing is the same throughout all the products available to you, options do however differ but I won’t cover those here as they are very complex.
Spread betting on Stocks by Spreadex
There are plenty of benefits trading in shares let’s use Microsoft (MSFT) as an example. These shares are currently in the region $55.00 per share, by share I mean standard share certificate, owning part of the company. However most people who buy shares do so as a long term investment of 2 to 3 years, and look to make a profit over that period. You would need a great deal of money to buy even just 100 shares. $5,500 in fact. Now if we bought the real share we’d have to pay this $5,500 and be out of pocket of $5,500 and now if the share rose up 10% to $60.50 and we sold we would get $6050.00 that is great. BUT! We would have to pay TAX on the profit as its classed as income. Also, we would have to pay the broker a fee to buy and to sell, plus the $5,500 we put in isn’t very liquid.
Whereas if we opened a trade, we don’t own the share and we could have made anything from 1p to £500 per 0.01p price movement. At £1 trade going long we would have made the same profit, but would have kept it all as financial spread betting is Tax Free and we don’t pay our Financial Bookmaker. Plus, we’re risking far less, not putting thousands of pounds into one share, our position is highly fluid and can easily be closed. Finally, we could have geared up our position by adding more to the trade as it went up. We could have started at £1 per point then moved to £10 easily and instead of making $550 we would have made $5,500 instead – for the same amount of work.
Not forgetting to mention that the biggest difference between trading in REAL shares and owning a part of that company and trading in financial spread betting, is that with financial spread betting, we can make a fortune when the price of ANY share, indices and many other financial products go DOWN. It does make me think why people really look to make money from shares in the short term.
My changing currencies may confuse some of you. My local currency is the GBP £, but the example I gave was Microsoft who are American and therefore quoted on the S&P500 (Standard & Poor’s – another Index). You don’t have to worry too much about trading in differing currencies. Everything is worked out for you. When you open most Financial Bookmaker accounts, you can decide the currency you wish to have your account shown in and therefore be trading in. I personally use GBP £ but it doesn’t matter if you choose the USD $ the AUS $ or whichever currency you feel comfortable trading in.
One other thing I feel I need to mention. Within this spread betting guide, I tend to concentrate on the FTSE100 to 350 and also the US markets. Now before you start worrying. It makes no difference where you live what trades you make, whether they are FTSE, DJIA, and NIKKEI. They are all just trades, it doesn’t matter which sector, indices or share you or I concentrate on. Therefore you will notice within this course I will be looking at the FTSE, however, I do make frequent visits into the S&P500 and the NIKKEI. Basically, don’t be alarmed if I keep focusing on the FTSE100 to S&P500. I try and keep an eye on as much as possible, but it makes sense to spot trends in the FTSE or S&P as these are the ones I know the most about.
The other advantage on individual share prices is that there is more information available to you than would be on any other trade. Simple when you think about it. As all the others are either Indices (a massive collective of companies), Sectors (companies within a particular industry grouped together), or commodities (Gold, wheat, sugar etc.) and so on.
Granted, our main concern is with Technical Analysis, therefore we rely mostly on data supplied in chart form. It is always nice to look at the company’s financial data, their profits and maybe even some of their products on the company’s own website. Plus, companies create news from press releases etc. Whereas Indices only make news if they reach a high or low and the same goes for sectors, as these are parts of an Index. Commodities make news only when there is price rises in Oil, gold etc. There are charts obviously but little news.
You have to remember and it is quite easy to forget, that commodities and Indices are traded as Futures contracts, not real Futures contracts but based on in terms of pricing and contract periods. So these are based heavily on greed and psychology – traders constantly second guessing where that market is going to go. If one company goes belly up in the FTSE, it won’t have a massive effect on the overall Index. This greed and fear is what fuels the Index Future and that is why they are so volatile and fluctuate a great deal. Shares on the other hand tend not to fluctuate as wildly and it’s easier to trade, in my opinion, using technical analysis, there is a reassurance that the share will gently follow the trend in the chart. Unlike an index, which tends to swing more and therefore there is greater risk of getting “Stopped Out”. All in all, I prefer individual shares to trade, for their ease in finding information, their relative stability in following a trend and the fact that I can easily get a gut feeling about the company, based upon what we have already surmised.
Therefore trading in singular shares has become one of the most common products within financial spread betting, because of the ease in gathering information, the ability to quickly gauge how that share is performing and simply because that most of us are familiar with the companies quoted, as they are house hold names.
A quick note about US shares. US stocks do tend to swing much more than those on the FTSE. This is simply because of the high volume of trades, which creates their more volatile nature. There is a great deal of money that can be made from trading US stocks, and they are good for spotting ‘bounces’ as their highly volatile nature makes them prone to swings in fortunes. It’s not unheard of for a stock in the US markets to drop several hundred or more points in one day. However, to trade the US markets you will need more margin, deposit with your bookmaker, to cover the trades. Because of the nature of the US markets and the fact that they do indeed swing much more than that of the UK or EU markets, the bookmaker, broker, financial company call them what you will, will ask for a higher amount of margin to cover the trade.
Personally, I feel that if you’re just starting out with spread betting and you have never done anything like this before, it would be advisable to start of with just placing UK trades to begin with, then moving onto more volatile forms of trading – US stocks, Commodities and the FX markets as your experience grows.
Right let’s move on. I gave an example previously of purchasing an actual share within a company – remember this is actually owning a fraction of the company. Perhaps the most important, or key aspect of this type of trade and the largest negative point associated with it is; if the share drops, so do your profits. There is no possible way to trade in real shares and make money when the markets fall, much like they have in the past and will do over and over again in cycles – as an aside; for those interested in spotting these cycles in markets there is an additional tutorial on the student website in Elliott Wave analysis, it’s well worth a look.
Whereas with financial spread betting, we are in the incredible position to benefit greatly when markets fall. In fact as a trader in financial spreads, we are in the excellent position of taking advantage of negative markets (going SHORT) and making money quicker than we could from a rising market. Why? Because shares fall quicker than they do when going up. Think about that for a moment.
Why do shares fall faster going DOWN and go UP slower? When shares go up, it involves people, institutions actually physically spending money, money is limited, even in huge institutions. Therefore, the share can rise from buying (supply & demand) and continue to do so until the money dries up or simply no one wants to buy. This is slow, sometimes there are panic purchases which cause ‘spikes’ or ‘breaks’ in charts (where the price has shot up so quickly that there is a break or spike in the chart) but money, interest, demand runs out.
However when the share drops. You have the entire shareholder stake at risk. There are the people who have recently bought the share and the people and institutions that have had the share months, years and sometimes decades, who maybe selling. This is why shares fall quicker. Selling causes panic, word spreads around and before you know it the share price has fallen through the floor. Mini versions of this happen everyday, some greater than others. More so in fact in US stocks.
To those that trade shares, this is a sad inevitable fact that you lose money quite quickly when shares fall. Spread traders on the other hand can’t wait for shares to fall and that is part of the reason why spread traders have had a good couple of years recently. The Dot Com crash and credit crunch crisis made a number of spread traders millionaires, whilst it left many share dealers broke and crying in their beer.
However, and this is another reason why most people involved with financial spread betting lose money. Most traders within Financial Spreads, never trade going Short. Yet this is the most profitable trade you can make. You will make more money trading short than long. Obviously prevailing markets have a strong say in what you do and I for one whilst doing my analysis will aim to have a balanced SHORT & LONG trades view for you to monitor.
Sadly though most traders only trade going LONG! Why? It’s down to psychology. For years we are taught that you can only make profits from shares if they go up, most traders think when trading in financial spreads that they physically own something when they don’t. I am not saying they believe they actually own a part of the company, but the underlying psychology suggests to the individual that they have a real stake and therefore should seek stocks that are rising. A lot of the time the people that get involved with financial spread betting have come from a “purchase & hold” share buying background, so they are conditioned to only pay attention to rising markets. It’s a way of thinking, we are taught that from a early age you can only make money if something increases in value, not drops.
They also tend to use the same strategy that may have worked well in a rising market with actual share purchases, but may not on the other hand work that well with open financial spread trades.
Now I am not telling you to always trade SHORT. I want you to learn that you can trade going LONG or SHORT. The key point is that you are aware that there are other means to making profit and they don’t require that trades or stocks are going up.
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