One of the basic indices that you can spread bet on is the UK 250, also known as the FTSE 250, or sometimes the FTSE Mid 250. That last name gives you a clue about its composition. Certainly, there are 250 companies included in the UK 250, but the word “Mid” shows you that they are medium-sized companies. This is because of the way that the UK indices are worked out.
Firstly, the companies are all ranked by market capitalization, which means that the companies with the largest total valuation come first. Market capitalization is simply worked out by multiplying the number of shares issued by the share price. The full range of general indices based on the London stock market include the UK 100 (FTSE 100), UK 250 (FTSE 250), and UK 350 (FTSE 350). There are other indices, which are more specific to certain market sectors. The 350 includes the top 350 companies, the 100 includes the top 100 companies, and the 250 includes companies that are in the 350 but not in the 100.
The FTSE 250 index is as such based on the next 250 largest companies quoted on the London market after those included in the FTSE 100. This means that they are smaller than the major companies in the UK 100, and generally referred to as midcap companies. Although there are 250 of them, they actually only account for about 15% of the value of the stock market. The top 100 include more than 80% of the overall stock market value, and the remainder of the value of the stock market, less than 5%, is in the thousands of other companies that don’t rank to be included in these indices.
These indices are checked four times a year, and changes made as required to promote companies into an index and relegate or promote others out.
What does this mean to you as a spread better? It is commonly reckoned that indices can be volatile, changing several hundred points in a day, which is something that you may wish to embrace as this is how you will make money rapidly, betting on the index changing. As the UK 250 has smaller companies than the UK 100, you can expect it to have reasonable volatility, though not as volatile as a small cap company index.
Volatility is a double-edged sword, and it is important that you have a clear understanding of what drives the index, and a clearly defined trading strategy to avoid being “taken out” by the market moving rapidly in one direction or another. This generally takes the form of establishing stop loss levels in advance of placing any bets, and these represent prices at which you will close your bet, whether or not you “feel” it is right. Trading on the financial markets is not something for which human beings have an innate sense, and following your feelings will usually result in losing all your money.
Once you have a good trading plan in place, and know that you can deal with any market moves against your bets without there being a disaster, it is time for you to go “live” and try your hand at betting on the UK 250.
Spread Betting – UK 250
When you spread bet on the UK 250 you will find that there is a fair amount of volatility, because it’s not based on the largest firms on the London stock exchange, but on midsize ones. This means that you need to have a good stop loss strategy to minimize the amount that you lose.
When you look up the UK 250 with your spread betting company (it may be called the FTSE 250) you might find that the selling price is 10,101, and the buying price is 10,121. If you think that the UK 250 will be going up in the next few days, you could open a spread bet in that direction at 10,121, betting say £8 per point.
When the index climbs, you could choose to close your bet and take your gains when it reaches 10,312 – 10,332. Your bet closes at 10,312.
Working out how much you have profited is a fairly simple calculation: –
- You have gained the number of points between the close and the open, which is 10,312-10,121.
- That works out to 191 points.
- Multiply this by your stake per point.
- 191 times £8 is £1528.
Indices do go down as well as up, and if this index had gone down after you placed your bet, you might decide to close your bet and cut your losses when the quotation was 10,089 – 10,099. Once again your bet would close at the selling price, which in this case is 10,089.
Nobody likes to work out their losses, but it is how you would do it: –
- You lost the number of points between the open and close, which is 10,121-10,089.
- The total number of points you lost is 32.
- You know your stake, and the points that the index moved.
- £8 multiplied by 32 is £256 that you lost.
Because this is a popular index, you will probably find future style bets available on it too. Say for instance that your spread betting provider is quoting 10,126 – 10,197. It is as easy to place a bet on the index going down as it is on the index going up, so you bet £3 per point that the index will go below 10,126.
After a couple of weeks you find that this futures index has a value of 10,016 – 10,087, and you decide to close your bet. Because you bet on the index going down, the bet closes at the buying price of 10,087.
The number of points that you have gained is 10,126-10,087, which is 39. As you bet £3 per point, you have gained the modest profit of £117.
This futures bet has quite a large spread, which cripples your gains. You really only need to use futures bets if you intend to hold the position open for a long time, otherwise it is cheaper to go with rolling daily bets. With a daily bet, which most spread betting providers will automatically roll over for you each day, you will find the tightest spreads and you will not pay much interest, just a fraction every night when it is rolled over.