How to Spread Bet the Russell 2000
Fancy spread betting the Russell 2000? Some people really like the excitement of trading on smaller companies, which are less predictable than the well-known giants. The Russell 2000 consists of 2000 small companies. The fact that there are 2000 companies in the Russell 2000 means that the volatility of the individual small-cap firms is smoothed into the index, making it a very tradable spread betting product.
Small-cap is a term that may mislead you if you’re not used to the stock market – even in the Russell 2K index, the average market capitalization for each company is about $1.25 billion (biggest company in the index is around the $5 billion mark). The 2K index is comprised of the 2000 smaller companies in the Russell 3000 index, which is itself the 3000 largest US stocks – so the 2K index ignores the first thousand companies, and is based on the remainder. In any case it is much broader-based index compared to the Dow Jones or the S&P 500 and is thereby considered by many investors to be a better guide to the corporate health of the US.
The Russell 2000 is also used by mutual fund companies to see how well their funds are doing. Some mutual funds invest in small-cap companies, and the Russell 2K gives them a barometer to market conditions. It’s not often pointed out that many mutual funds do not perform as well as the associated index for the market sector they are selecting from. And if a mutual fund does well against the market index, it is counted a success even if the index and the fund have gone down in the last year. This may explain the popularity of short-term trading and spread betting.
With the recent economic recession, many people are looking towards small caps to see when they will start to perform better. The common wisdom is that small caps are “lighter on their feet” and thus their profits and share prices will improve before the large cap companies. Because of this, you will find that the Russell 2K reacts differently to the larger Dow Jones Industrial Average (DJIA) and the S&P 500, and other major US indices. For one, most of the companies making up the Russell 2000 are based in the United States and there are no no multinational giants in the index.
Small-cap companies are more volatile, and that means that the preparers of the Russell 2000 index completely reconstitute the component companies every year, because of the rapid changes. Small-cap companies may not remain so, as if they are successful they will expand and become large or medium cap, and if unsuccessful may be wound up or at least delisted from the major stock exchanges and put on the “over-the-counter”market.
Volatility is a relative thing, and as pointed out above when you smooth the figures by taking as many as 2000 companies you are only going to see the general drift in the market, rather than being affected by individual fluctuations. But you will find sufficient movement in this index to satisfy your need for price change in order to profit from spread betting.
The general advice when spread betting the Russell 2K is that you should look for technical indicators showing you an imbalance between the price action and the underlying mood of the market. No one can predict where the market is going, therefore whenever you place a bet or a trade you need to be sure that you know exactly when to “pull the plug” on the trade and cut your losses if it moves against you.
Spread Betting – Russell 2000
The Russell 2K index is listed under “Other” in the US tab on IG Index, where it is called the US Russell 2000. The current quote is 723.25 – 723.55.
You decide that the index will be going up, and place a spread bet at £25 per point. Your starting value for the index, as this is a “buy” bet, is the higher number 723.55. Suppose the index goes up, and you decide to close your bet when it reaches 752.16 – 752.46. With this “long” bet you close the bet at the selling price of 752.16.
Now is the time to work out how much profit you made.
The number of points that you gained is 752.16-723.55, and that works out to 28.61. As you bet for £25 per point, you simply multiply these numbers together, and that gives you a profit of £715.25.
Your bet will not always work out as you wish it to, so say instead the index went down and you decided to close your bet when it got to 711.34 – 711.64. Again, you are closing a long bet so the price that counts is the selling price, 711.34.
The number of points that you have lost is 723.55 less 711.34. This works out to 12.21 points. Your stake was £25 per point, which means you lost 12.21 times £25, or £305.25.
Because you are spread betting, it is easy to profit from the index going down. You just place a bet at the selling price. The original quote from your spread betting company was 723.25 – 723.55, and you place a “short” bet for £19 per point, which means you win £19 for every point that the index goes down.
The index drops to 698.72 – 699.02, and you close your bet to take your winnings. The bet closes at 699.02, the buying price. The number of points that you have “gained” – remembering that you are spread betting on the Russell 2000 index going downwards – is 723.25 less 699.02, which is 24.23 points.
Given the number of points that you gained, and your original stake, it is easy to figure out how much you won. Simply multiply together 24.23 and £19, and you see that you won £460.37.
Once again, you have to be careful about how much you risk, and how far you next the index run against you before you close your bet and accept your loss. One secret to being successful at spread betting is to make sure you do not lose all your money, and you must accept that bets going against you is a natural turn of events.
Suppose that the index gained after you had placed your short bet, to a level of 735.13 – 735.43. Now you have to choose to cut your losses, and close the bet.
The amount you lost is 735.43 minus 723.25 times the stake of £19 per point. If you work that out, it comes to 12.18 points times £19, which is a total of £231.42.
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