Spread Betting the FTSE 100
As one would expect the FTSE 100 is the most popular spread betting index to bet on, not least because most spread traders are located in the United Kingdom and more likely to be familiar with this benchmark than other markets. Usually you can take a spread trade on the FTSE 100 for as little as £1 a point and the market trades from Sunday night all the way to Friday evening.
But what is the FTSE 100? The FTSE 100 market consists of an index that is constituted of the 100 largest listed companies in the United Kingdom by market capitalization. All these companies are listed on the London Stock Exchange. Market capitalization refers to how big or small is a company and is calculated by multiplying the number of stocks in issue by the prevailing share price. The FTSE index started being calculated in 1984 initially having a base value of 1000 and now makes up about 81% of the value of all companies listed on the LSE thus rendering it a good barometer of the state of UK business. To effectively trade or place spread bets on the FTSE 100 you first need to understand what makes the FTSE move.
What makes the FTSE Index Move?
Company Earnings
Stock market speculators and spread bettors follow the earnings of companies making up the FTSE index which are usually released on a quarterly basis. Analysts will regularly make up a consensus forecast on such earnings and should the actual number be better than the analyts’ expectations, then the price will rise and if it turns out to be worse, then the price should fall. Naturally the earnings of companies making up a bigger chunk of the FTSE index (say the top 10 by market capitalisation including HSBC, Vodafone, BP and Royal Dutch Shell) will have an even greater impact on the movement of the FTSE 100 index and should be monitored more closely. The main FTSE sector constituents are financials making about 20%, next oil and gas at 19% and basic materials at 14%.
News
All day FTSE stock market traders are glued to their news screen on the lookout for news that might impact the economy and the markets. News that might move the FTSE index can range from company specific events to news from the other side of the Atlantic. Here it is important to have access to live-feeds as the financial markets are very efficient and most news will already be discounted in the price by the time the masses read the story on newspapers. Daily high-low fluctuations of around 60 points are common for the FTSE although movements of 100 points or more are not unheard of during volatile periods.
Interest Rates
FTSE day traders will keep a watchful eye for any prospective change in interest rates as this will also have a consequent impact on stock market valuations. Generally, lower interest rates represents good news for the FTSE index as this means that the companies constituting the index will not only have to pay lower interest rates on debt (thus rendering them potentially even more profitable) but also the returns the FTSE could offer look more attractive in investors’ eyes in respect to the lower interest rates one could get from bonds.
Spread Betting the FTSE 100: Practicalities
You can spread bet the FTSE using either the daily rolling bets or futures. Daily bets are more suitable for short-term trades and comes with very tight spreads – typically at just 1 point. As the name suggests daily rolling bets can be rolled over from one trading day to the next, subject to a small financing charge each time this happens. Longer term trading views can be taken using the quarterly stock index futures. The spread for futures is wider but these contracts do not incur daily financing charges. Initial margins usually work out to around 40 times the stake for both FTSE daily bets and futures.
A £1 point bet stake on the FTSE 100 would translate into an effective exposure of £5,500 (with the FTSE at 5,500). If you are considering a medium or long term trade you will need to utilise fairly wide stops to take account of the day-to-day market fluctuations.
Spread Betting the FTSE 100 (UK 100): Example
The UK 100, or “footsie”, is one of the most familiar indices for most spread betters. When the markets are open, if you have a variable spread betting provider, you will find some of the smallest spreads on this index.
Say that your spread betting company is quoting 5491.5 – 5493.5. You think that the FTSE will be going up, so you take a daily rolling bet for £4 per point that the index will increase. When it reaches 5562.3 – 5564.3 you decided to collect your winnings, so you close your bet.
To work out how much you have won, you must figure out the point difference that you have gained. Your initial bet was at 5493.5, as the higher number is the buying price. When you closed your bet it was at the selling price of 5562.3.
That means the total number of points you gained was 5562.3 less 5493.5. This works out to 68.8 points.
Your bet was for £4 per point, so the amount you have won is £4 times 68.8, which is £275.20.
It’s quite possible that your bet did not win. Some successful betters even lose more often than they win, but make a profit because they make sure when they lose they close the bet and cut their losses quickly. Say that instead of going up the FTSE went down and you decide to close the bet at 5473.2 – 5475.2.
That means you open the bet at 5492.5, and closed the bet at 5473.2. Your total losses were 5492.5-5473.2, which is 19.3 points. For your initial stake of £4, that amounts to a cash loss of 4×19.3, which is £77.20.
Assume now that you want to take a view on a futures spread trade. The quote you get for a spread bet finishing in three months time is 5466.5 – 5476.5. You decide that the index will be going up over the long-term, and stake £8 per point on the UK 100.
Although this is a long-term futures bet, you can close it at any time, and you choose to cash in the next week, when the index has shot up to 5682.1 – 5692.1.
As this was a “long” bet, your starting level was 5476.5, and you closed at 5682.1. That means you gained a total of 205.6 points. You placed a bet of £8 per point. To find your total winnings, you must multiply the points change by the stake, that is 205.6 times £8. Your total gain on this spread bet is £1644.80.
Once again, you might not have been so lucky or skilled, and the index might have fallen. In this case say it dropped to 5438.2 – 5448.2 before you decided to cut your losses and finished the bet. The starting value was the same as before, 5476.5, and you closed out at 5438.2. This means that the index fell 38.3 points against you. The bet was still £8 per point, so you multiply these together to find out what you lost.
£8 times 38.3 points amounts to £306.40, and that is a total that you lost on this bet.
Join the discussion