Spread Betting Markets: Stock Indices

Spread Betting Indices

Spread betting on indices makes up one of the most popular forms of trading. Indices themselves are the most traded markets in the world. An index is a collection of stocks and the corresponding composite value of its components. In the UK, the FTSE 100 is the index which consists of 100 of the largest publicly listed companies in the London Stock Exchange. Where traders and investors would normally be restricted to speculating on the price direction of one particular asset, index trading via spread bets enables you to invest in segments of the market, or even the health of the broader national market. A stock index represents a basic summary of the health of the country’s financial markets and in this respect share indices are often looked at to provide a snapshot on an economy. Indices are representative of the whole performance of a specific market or industrial sector and as such can be made up of many hundreds of different companies, or just a few that share specific industry traits.

In England there is the FTSE 100, FTSE 250, and FTSE 350, in Germany there is the DAX 30, while in the USA there is the Dow Jones Industrial Average, the NASDAQ, and the S&P 500. These are the main ones, and there are many more indices, both in these countries and in other parts of the world, each with its own characteristics. For instance, as the FTSE 100 is the 100 largest companies in the UK market by capitalisation, the FTSE 250 comprises the next 250 smaller, or mid-cap, companies which will react differently. In the US, the NASDAQ was the first ‘virtual’ electronic market rather than a physical stock market exchange, and it tends to have more high-tech and biotech stocks. It is worth mentioning that sub-indices normally include companies in certain industries, like mining, banking, technology…and so on.

“What makes an Index go up or down? There are a lot of things that could move indices but in the main an index is made up of its individual constituents. For instance the FTSE 100 index is made up from the top 100 listed companies in the United Kingdom by market capitalisation. As such when the majority of these companies go up, so does the index. After-hours (i.e. when exchanges like the LSE close) indices trade on future prices”

Major Indices You can Bet On

There are many markets available for you to trade, as follows:

While there are many constituent shares to each of these indices, for the trader who wishes to take a more overall view of the economies rather than drilling down into individual companies and analysing them, the indices represent a sound and fairly stable financial instrument on which to place a spread bet.  Good index trading opportunities particularly abound in times of big uptrends or downtrends. Betting on indices has been especially popular in recent months as the uncertainty in the eurozone area has pushed spread betters and traders to attempt to profit from the swings in the market by placing short-term trades on indices. When trading such equity indices it is worth keeping in mind that they have a tendency to follow each other which means that an index such as the FTSE it is good practice to keep an eye on the USA markets.

“The most traded index markets with most spread betting providers tend to be the UK 100, Germany 30, Wall Street, Japan 225 and Australia 200 with the most popular traded markets typically being the FTSE 100 and Dow Jones. This is probably because most spread traders are familar with these markets and presumably because they seem straightforward. These markets tend to get more coverage from the media and traders tend to feel that they understand what makes these indices move”

Indices aren’t measured in pounds or dollars but numeric ones and up and down movements as such are calculated as a percentage. So if the FTSE 100 is at 5500 and this closed down to 5420 by the end of the trading day, this is equivalent to a 1.45% fall. Speculators normally bet on the number of points that they believe an index will rise or fall. Note that most spread betting providers will quote the main index markets even when the underlying markets are closed. This is because the prices are based on the futures contracts and there is a market in, say, the FTSE 100 futures even when the London Stock Exchange is closed. This is the market that spread betting providers utilise to make their price ‘out of hours’. One such company that deals in “future” contracts is EuroNext. In practice this means that you can trade these markets whenever you want and prices out-of-hours would reflect what is going on in the exchanges that are still trading. In the case of the FTSE, the FTSE futures are quoted until 9.00pm and after that the spread betting company will base its prices on the Nikkei and the out-of-hours Dow. Note, however, that there is an additional premium on the normal spread if you trade out-of-hours and the spread on the FTSE could go from just one pt to 5 pts or more at 9.00pm to represent the extra risk in quoting this market and the lack of liquidity.

Major Index Markets

More Profitable Markets You Can Trade

Spread traders might opt to bet on the direction of a single index or perhaps even a pair (the FTSE 250 versus, say, the S&P500). Although the FTSE 100 Index is perhaps the most popular financial market for financial spread betting, as well as being the easiest to understand and obtain information on, it is not the only market on which it is possible to bet. The financial bookmakers offer bets on all kinds of other markets, and are always adding new ones. Generally, if sufficient people wish to bet enough money on it the spread betting companies will cater for them!

It is sometimes possible to make much more money in the non-mainstream index alternative markets, since they are lesser known and attract more serious gamblers with higher stakes to place. It is also fair to say that the financial bookmakers are often less knowledgeable about obscure markets, thus increasing the likelihood that you can catch them out and make a small fortune with your superior knowledge on that particular market!

While it is probably best to wait until you have some experience to tackle other markets they are certainly worth considering and we will outline some of the alternatives, and techniques and strategies to use in them, in this section.  Strategies include pairs trading, hedging, trend trading and using technical analysis to pick support and resistance levels and trading off them.

Key Principle To Remember When Choosing Other Markets : The markets which offer the greatest potential for profit and so which, by their very nature, are most volatile also offer the greatest potential for loss.

Stock Markets Of The World

Although the London Stock Exchange is one of the world’s major financial markets it is most certainly not the only one. Almost every other country of the world has a stock exchange, and the bookmakers will accept bets on many of them.

The fact that a stock market is in another country is almost irrelevant in financial betting. So, do not be deterred from betting on it just because it is ‘foreign’. The only slight difficulty with betting on foreign stock markets is that it can be more difficult to obtain the information you need to make informed decisions. However, with the advent of the Internet this is less of a problem.

The leading foreign stock market is the New York Stock Exchange (NYSE) which is also the most important in the world. It is covered by the following indexes :

  • The Dow Jones Industrial Average, which is a 30 share index.
  • The NASDAQ composite index.
  • Standard & Poors 500 Index (known as S&P 500) – this USA index has 500 constituents and in a way is more like the FTSE 100 and FTSE 250 combined.
  • The Russell 2000 Index.

Most UK financial spread betting companies accept bets on The Dow Jones either on a ‘daily’ or a ‘future’ (quarterly) basis and these bets work in exactly the same way as bets on the FTSE.  So far I have only discussed the major indices such as the Dow and the FTSE.  Everything I have said applied to the other markets as well.  If you are new to this game, I suggest you to start out by trading the FTSE as this is something you will have experience of, and an opinion about.  You probably don’t have much experience of trading the Yen against the Dollar, or buying/selling potatoes.

The second most important foreign stock market is the Tokyo Stock Exchange (TSE). With this exchange bets are normally taken on :

  • The Nikkei Dow 225 Index (225 companies).

Other important stock markets include :

  • Hong Kong : The Hang Seng Index (33 companies).
  • Paris, France : CAC 40 Index.
  • Frankfurt, Germany : Dax 30 Index.
  • Singapore : Straits Times Index.
  • Swiss Stock Exchange.

Further world stock markets (not necessarily offered by all bookmakers) include : Amsterdam (AEX), European Exchange (Frankfurt), Milan (MSE), Osaka, Japan (OSE), Thailand (SET), Malaysia and Australia.

Betting on foreign stock markets works in exactly the same way which I have already outlined except, of course, you are dealing with an a stock exchange located in another country and you must find and use information related to that country to help you make your decisions.

Where One Leads : Many experts believe that betting on other world markets has one further and very major benefit. It is this : The American and Japanese stock markets are very much the barometer of the world economy. Quite often trends that start in the American or Japanese stock markets also occur in the UK market, but a little later. So, active involvement with foreign markets can also help you refine your betting strategy on the UK market.

Remember The Differences : To succeed in betting on foreign markets always remember the time differences. Always find out what time the market opens, and what are the usual business hours in the country concerned. Although you can place or close trades at any time the bookmakers foreign markets often open or close part of the way through the business day in the UK.

One important distinction between the indexes is that while the Dow Jones has listed companies according to their share price, whereas the FTSE 100 index includes companies on the basis market capitalisation (stocks in issue x current share price). The S&P 500 is also an index that bases its constituents on market capitalisation (in this respect it is ‘value’ rather than ‘price’ weighted).

Difference between Value Line Arithmetic Index and Value Line Geometric Index?

When comparing different index markets, there’s also the issue of arithmetic vs geometric averaging.

The Value Line Composite Geometric Index is an unusual equally weighted price index of all the stocks covered. Geometric makes reference to the geometric averaging system that is utilised to find the average, which is the nth root of the product of a set number of terms. For instance, if there are 5 terms, then the geometric average of the 5 numbers would be the third root of the product of the 5 numbers. Geometric indices are not commonly used. The index is watched as a proxy for the market’s performance and represents the typical retail investor’s portfolio. Institutional investors like it because it is an indicator of how mid-cap shares are performing.

There’s also an Arithmetic Index which uses the Arithmetic Mean by taking the average. A performance of +90% +10% +20% +30% and -90% would return an arithmetic average at 12% [{(90+10+20+30)-90}/5]. However taken geometrically, the average is negative at -21% which is why it is important that you are comparing like for like.

24 Hours of Spread Betting Indices

  • 07:00

In France, CAC 40 market hours trading starts.

  • 08:00

As the Hong Kong index is about to close, the FTSE 100 and DAX both open for trading.

  • 14:30

DAX market hours close in Germany. On the other side of the Pacific, the Dow Jones Index opens for trading.

  • 16:30

The FTSE closes for the trading day after 8.5 hours of trading.

  • 17:15

In France the CAC closes, 10.25 hours after opening at 7:00.

  • 21:00

After 7 hours of trading, the US Dow Jones closes for the day.

  • 23:00

On the other side of the world, the Australia 200 opens in Sydney.

  • 0:00

In Tokyo, the Nikkei 225 opens. This is the most widely quoted average of Japanese stocks and it is updated every 15 seconds during market hours.

  • 2:00

As the Hang Seng index of Hong Kong stocks opens, the Nikkei 225 closes.

  • 3.30

After closing for 90 minutes at 2:00, the Nikkei 225 re-opens in Tokyo.

  • 5:00

The Australia 200 closes, 6 hours after opening.

  • 6:00

The Japanese Nikkei 225 closes following a total of 4.5 hours of trading.

This table means that if you get up around 6:00 you could have 1 hour support/resistance preparation etc. done before the Frankfurt and London markets open. Don’t stay too long at the screen, maybe 3 hours maximum but make sure that time is fully focused on trading and nothing else.

Spread Betting Stock Index Futures

American indices – the Dow, S&P and Nasdaq – are open from 07:00 until 21:00 every trading day. The daily index markets can usually be traded even though they do not open until 14:30, as the underlying futures markets are open and the daily markets are a fair value price based on the futures. They will settle to the official close of the indices. European markets open between 07.00 and 08:00.

“Index trading opens up many more trading possibilities; for instance when the Greek crisis was in full swing you could have opened a short position on the main Green stock market index, commonly referred to as the Greece 20 in spread betting terms – which index follows the largest 20 quoted companies on the Athens stock exchange. Now that the focus has turned to Spain, you could turn your attention to the Spain 35, which tracks the price of the largest 35 companies listed in Madrid”

Spread Bet Future Example

  • Tom Technician sees a change of trend taking shape on his charts.
  • The FTSE100 index reached a record high of 7510 a month ago and has just failed to break through this level for a second time.
  • His system shows that a new 40 day low has taken place.
  • Tom’s bookmaker is offering a spread of 7445-7457 on the September FTSE.
  • Tom backs his system and makes a £30-a-point down-bet on the FTSE 100 index. For safety, he arranges a guaranteed stop at 7632, to limit his potential losses to around £5,700.
  • His break-even level for the September FTSE is 7442, the bottom of the spread minus three points given up in return for the guaranteed stop.
  • Some 10 days later and a big fall overnight on Wall Street sends the FTSE spiraling down 250 points. The spread betting provider’s spread for the September FTSE now stands at 7190-7202.
  • Tom decides to hang on a bit longer for a bigger fall, even though he is now £7200 in profit (7442 minus 7202, times £30).
  • Two days later, the FTSE 100 index shows signs of stabilising, and the September spread moves back up to 7247-7259.
  • Tom’s trailing stop loss is hit and he decides to take his profits before the rebound in the index goes any further. His profits are £5490 (7442 minus 7259, times £30).