By Thomas Bainbridge
A resurgence of sovereign debt problems suddenly appears to be worrying the financial markets. Looking at the stock markets, the FTSE 100 is looking rather tired up in the 5700-5800 region.
So far, the high for 2010 occurred in April when the market hit 5840 before a concerted slump. It will have weighed on investors’ minds that the same conflux of events occurred back then to take us lower. This came in the form of sovereign debt worries, weakness in the western currencies, a surge in oil up to high $80s and so on.
We obviously aren’t expecting a repeat performance, but bulls should be reminded that the equity markets slumped 15% back then. Caution and stop losses remain worthwhile weapons in your trading armoury.
The extra caution looks valid according to a recent Tradefair report. “The diversity of results [in the FTSE] out of corporate UK continues to bemuse with Trinity Mirror showing poor advertising numbers whilst News International and DMGT surge and JJB reporting a profit warning while other retailers continue to shine” it read.
“In other sectors, Land Securities announces buoyant demand while builders and servicing companies seem to be calling in the administrators on a weekly basis.
“When the UK economy was pulling out of its nose dive, we should have expected this type of dual result but with the economic turnaround apparently well under way it is surprising, and worrying, to see such a resurgence of bad results.”
Whatever your theory on which way the markets will turn next, you should always remember that if you trade the financial markets you are likely to lose some trades. Irrespective of whether you trade through spread bets, CFDs, ETFs, or by buying traditional stocks and shares, the markets may move against you.
But where should you look if you want to trade the stock markets? What if you are only thinking about risking a few hundred Pounds, Dollars or Euros? What if you only want a small amount of exposure to the markets but that’s all? In the UK, and increasingly the international community, investors are using spread betting as one of their primary investment formats.
The one thing I always try to stress to anyone thinking about trading the markets is that nothing is certain, you are likely to lose some trades. Naturally, as with all investing, be it on stocks and shares, exchange traded funds, pensions or any other form of financial investment, there is a downside, and with spread bets you need to be careful because you can lose more than you initially invested.
However it is extremely important that, if you are considering this type of investment, you are aware that spread bets do carry a high level of risk. Before trading, please check that spread betting matches your investment objectives. Ensure you familiarise yourself with the risks. Seek independent advice where necessary.
At the same time though, you can put limits on your bets to help reduce your potential losses without impacting your upside. You can also trade with smaller stakes such as £1 per point or $1 per point.
To gain a small amount of exposure you could just trade American, German or UK stock market indices. You could, for example, speculate on whether the S&P 500, DAX 30 or FTSE 100 will go up or down.
With any of these, as we have said, you can trade £1 per point or $1 per point etc. If you speculate on the FTSE 100 to go up, with a £2 per point stake, and it goes up by 60 points then you would make 60 points x £2 per point = £120.
You are also able to trade the markets in Euros and Dollars. If you want to trade in Dollars then 60 points x $2 per point = $120.
Of course, should the market move against you, dropping by say 50 points, then with a £2 stake you would lose 50 points x £2 per point = £100.
Obviously this would not be a great start. However, with several companies like Financial Spreads you can add a Stop Loss at, let’s say, 20 points.
If you were betting on the FTSE 100 this would mean that your bet would be closed if the FTSE 100 moved against you by 20 points. Therefore, instead of losing £100, you’d only lose 20 points x £2 per point = £40. (Not all Stop Losses are guaranteed).
Of course, if you correctly forecast the direction of the market then you would still make a profit of £120 if it moved 60 points or £60 if the FTSE 100 moved 30 points.
Financial spread betting comes with a wide variety of advantages, not simply this risk management aspect.
Many wide ranging financial markets are accessible. You can speculate on thousands of markets from the very popular FTSE 100 and Dollar/Pound exchange rate, to global bonds and interest rate markets.
Also, you are not buying or selling any assets or rights; instead you simply speculate on the future value of a given market. As a result, under current UK and Irish tax law spread bets are not subject to capital gains, stamp duty or income tax (note that tax law can changes and other jurisdictions may vary).
Finally, you are able to buy or sell markets. Therefore, you can spread bet on a market to move in the direction that you think it is going to move. Spread betting does not force you to bet on a market to increase, if you think the FTSE 100 will fall you can also spread bet on it to do just that.
About the Author
A leading financial author writing from the heart of London’s Canary Wharf. Thomas Bainbridge is a respected commentator on the spread bet and CFD markets.
