Spread Betting Small Caps

UK non-350 shares, which basically means shares of small cap companies, can be an excellent adjunct to your spread betting arsenal. While you possibly should not “bet the farm” on solely this type of company, it is worth having some exposure to this group along with shares in larger companies.

One company in this group is Photo-Me International PLC, operator of the ubiquitous photo booths. It is not widely known that these booths are in 15 different countries, and that after some reorganization in 2009 Photo-Me is in the process of turning round the business – or so they hope. Suppose on 17 October, when the quote was 46.86 – 47.14, you had looked at the chart below and decided to go long, on the strength of the signal line of the MACD crossing from a low position (see below). The Bollinger bands have tightened up at this point, which usually suggests that there will be large movement in one direction or another. You could have staked £12 per point, having worked out your money management. Your stop loss position might be at 42, the nearest proven support level and also the level of the lower Bollinger band.

Spread Betting Small Caps

You can see the result would have been very favourable for you. The MACD triggered your spread trade at just the right point, and was followed by a surge upward in price. If you are following your trade with a trailing stop, you probably have exited on the day of the last white candlestick to the right, at a level of about 60. Let’s say your spread betting provider was quoting 59.86 – 60.14 on this day.

Having ended your bet, you then proceed to work out how much you have profited. As it was a long bet, your entry was at the higher, or buying number of 47.14. Your bet would close at the lower, or selling number of 59.86. That means you have profited from a point movement of 59.86 minus 47.14, or 12.72 points. Multiplying this times your stake, you have made £152.64 profit.

Although this trade had some positive signs, it might have failed. It was on a reversal, and it is hard to pinpoint real reversals consistently. The moving average lines indicate that there was a downtrend in existence, so you are betting countertrend. Say that you had placed the same bet, but unlike the actual outcome, the share price had gone downward instead.

As you always should before placing a bet, you had already identified a price level at which you would accept that the bet had failed, and exit to cut your losses. This level was at about 42, looking at the chart. Assume that the price dropped to 41.86 – 42.14, and you took this as a sign to close your bet.

The bet closes at 41.86. The number of points that you would have lost is 47.14 minus 41.86, which is 5.28. For the stake of £12, you would have lost a total of £63.36.

How to Spread Bet UK Non-350 Shares

For your risk capital, you may want to look at spread betting on the UK non-350 shares, which is the companies that are smaller than the FTSE 350 companies, and which are generally referred to as small cap companies. Small cap companies generally go up to a market capitalization of around £300 million, so in truth they really are not that small, just small relatively to the others.

You will not find so much information about these companies available, so you will need to do your independent research to see which you feel justify a spread bet. Because the less traded companies tend to be quoted with a larger spread, you are looking for possibilities of a large move in price in order to make up the spread and make a profit.

However, these companies are “light on their feet” and can experience fluctuations in price which you would be unlikely to see in larger companies. The smaller size means that they are generally more risky in the longer-term, but some will inevitably be winners, eventually expanding up to mid-cap companies or even large cap companies, which could provide you with the major returns.

The shares of small cap companies are frequently not so liquid as for their larger brethren, and if you build up a large position in your bet, then need to exit quickly, your spread betting company may find it difficult to do the trade. This is why they “charge” you, by insisting on a larger spread. This means you need to be careful not to over expose yourself to this type of market.

The other issue which you may have with trying to spread bet on UK non-350 shares, or small caps, is that you will find that not all spread betting companies cover the range of shares. This is inevitable, as it has to be a certain level of turnover for it to be worth their while. If you’re interested in spread betting in this market, IG Index offer a very good range of small cap companies at reasonable spreads.

Your trading strategy must adjust to the demands of this type of spread betting. It is not like simply short-term trading by buying stocks, where any profit is a plus, as when you are spread betting you need to cover your spread before you get into profit. Therefore your strategy should be looking for the possibility of large swings in price, perhaps even trading the news if you understand that new products or processes are being announced shortly.

Another ploy is to look for possible takeover targets, as this usually results in large swings in price which you can profitably exploit. If a small-cap company has a patented process that threatens a larger company, or allows the large company to streamline its own manufacture, there is a very real possibility that the small company and its process will be bought out. While you must analyze the situation and understand the price can go either way, the usual result is that the small-cap shares increase in value dramatically as the larger company can take better advantage of the new technology.

Quick Tip: I am struggling to write up the manaual to the investment process….but I have stumbled across a new pointer:

a) Investing in smaller company shares is twice as tricky as bog standard Income and Growth.
b) Investing in Specialist shares-e.g. miners where it is hard to forecast electricity input prices, government greed, output levels and output prices- it is 3 times as hard.
c) But if you invest in smaller specialist stocks (drum roll for RRL) the difficulties are exponentially harder and, despite the rewards, for mere humans we must treat this as “the Wally box”.