Spread betting the FTSE is a great way to start trading, as most people with any interest in the financial markets have some idea of the way the value of the FTSE changes, even when they do not know much detail about the individual stocks and shares that make it up. Spread betting is all about anticipating the future direction of a price, and betting appropriately. Because it’s called betting, it’s free of capital gains tax in the UK, but the effect is just the same as if you are trading.
But seasoned traders too can make good money by spread betting the FTSE, and it allows you to take a top-down view of the market rather than having to wade through the details. Spread betting lets you make money whether the FTSE goes up or down, you just have to make your bet in the right direction.
Trading on equity indices gives you exposure to a basket of different shares in a single transaction. When we talk about the FTSE, we usually mean the FTSE 100 index which is based on the performance of the top 100 companies in the UK market, and that is what is shown in the examples. You may also hear about the FTSE 250 index, which is based on the next 250 companies after the top 100, and the FTSE 350 which is a combination of those two indices. As the largest companies can perform differently from smaller companies, it can make a difference which index you trade.
Daily FTSE Trade Example
For example, if you thought that the FTSE 100 was going to go up, you would choose to “buy”. If the quote was 5750 — 5751, that means you could buy at 5751. The other figure is for selling, and the difference between them is the “spread”, which is how the spread betting firm makes money. You choose exactly how much you want to risk, with the understanding that the index could go down instead of up, and you would then lose money.
Say you bet £1 per point, buying at 5751. The market rises as you expect, and you decide to close your position later that afternoon when the quote from your broker for the FTSE 100 stands at 5770 — 5771. You close your position by selling, which is at the lower price of 5770, and that means a gain of 19 points (5770-5751). At £1 per point you have a profit of £19. Similarly, at £10 per point you have a profit of £190.
Suppose instead that the market falls, and you have to rush to close your position before you lose too much. If the quote was 5742 — 5743 when you liquidated your bet, you would sell at 5742 losing 9 points. That means you would lose £9 if you were betting at £1 per point. Similarly, at £10 per point you have a loss of £90.
You can just as easily go short, or sell the position if you think the index will drop. Suppose in that last example you anticipated the drop, you would open your bet by selling at 5750 and close by buying at 5731. That would give you 19 points gained, for a profit of £19.
FTSE 100 Spread Betting Strategies
The UK 100 Index is commonly known as the FTSE 100 index or sometimes simply “footsie”. It is the primary index for showing the state of Great Britain’s economy. It was launched in 1984 with a base value of 1000, and it’s been up to nearly 7000 but is now around 5500. It is a market capitalization index, which means that it includes the largest 100 companies on the London Stock Exchange. This actually covers more than 80% of the value of all the companies on the LSE. Globally, the FTSE 100 accounts for over 8% of the world’s equity markets.
There is a further part of the equation which specifies that it is a “free float” index. All this really means is that the shares used for calculating capitalization are available on the open market. They adjust to the constituents of the index every quarter. Companies from the FTSE 250, which covers the next 250 largest companies, can be promoted into the 100 if they have a capitalization greater than the top 90 in the FTSE. This restriction ensures that there is less promotion and demotion than otherwise, which might foster uncertainty.
The 10 largest companies in the FTSE 100 include three oil and gas companies and two mining companies. The ten oil and gas companies in the entire FTSE 100 comprise about 20% of the total value, and are the largest market sector.
Because the FTSE is so well known and so heavily traded, you are sure to find that any spread betting company lists several available bets – a rolling daily one and several different future-based bets. There is also no shortage of advice to be found on the Internet on how to trade the UK 100. The best advice is to read this but make up your own mind.
It is common with market indices that they fluctuate a lot, and the UK 100 is no exception. This is perhaps why it is one of the favourites among spread betters. Another reason would include the familiarity that many traders feel to the product. But anyone who says that the stock market is a great place for long-term cash as it will always beat any other investment should face up to the fact that they are talking averaging out over a very long-term. The actual figures suggest that the market returns are not so great.
Over the last 10 years the total return from the FTSE 100 index averages out to 4.1%. Along with small-cap shares, the index has been disappointing for a buy and hold investor. On the other hand, the volatility has been consistently around 15% for many years, which is great news for someone who is interested in trading and therefore in prices changing with large swings.
As always, the caveat when spread betting is that you must take care to protect your capital, accept that some bets will lose and close them quickly, and enjoy the profit that you can make from the volatility.
A Down Bet on the FTSE 100
Let’s now assume that the FTSE 100 is presently trading around the 5600 level. You are worried that the ongoing market turbulence is going to negatively impact your blue chip UK shareholdings so you decide to hedge your exposure by shorting the UK 100 with a spreadbet. The spread betting provider is quoting 5600/5601. You sell at £10 per point meaning you will profit £10 for every point the index moves down. You place a stop loss order at 5620 as you would like to cap your losses to £200 (£10 x 20pts) should your prediction prove wrong. You are aiming for a gain of £600 so you place a limit order to buy the FTSE at 5540 (i.e. 60 point move translating into a £600 profit)
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