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Index Spread Betting |
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With index spread betting you are generally spread betting on share indices, also known as stock market indices. Having said that, with spread betting there are other popular index markets such as the US dollar index.
Nevertheless in this article we will look at shares indices. A good example of a share index is the FTSE 100. It represents the top 100 listed companies in terms of market capitalisation on the London Stock Exchange. In a certain way one could look at an index as a chart depicting the average price of all those shares. The difference is that indices are sometimes weighted, ie an individual share is given a weight according to its price, the company’s market value, or both.
If an investor is looking for some exposure to the UK stock market they could speculate on whether the FTSE 100 will go up or down. They could buy/sell all the individual shares but that would take a lot of your time. It would also increase their trading costs.
Spread Betting on a Share Index
Although there are other ways to trade an index, such as ETFs, spread betting offers a convenient way to quickly trade a range of share indices from around the World. For example, with Financial Spreads you can trade the FTSE 100, Dow Jones, the German DAX 30, the Japanese Nikkei 225 and even the Ireland 20 index.
When spread betting on indices you are not actually buying or selling any shares; you are simply speculating that the price of the stock market index will go up or down. For a detailed trading example see How to spread bet on indices.
Advantages of Index Spread Betting
One advantage that immediately comes to mind is that the volatility of an index is often lower than the volatility of individual shares. The chance of your long trade suddenly dropping 10 percent overnight as a result of bad news is therefore much less likely than the chance of it happening to an individual share.
Having said that, with market moving events such as 9/11, the stock market as a whole can drop through the floor overnight and so will an index. Be aware that with spread betting you can protect yourself from such a big fall by adding a guaranteed stop loss to your trade.
Since a stock market index is normally less volatile than an individual share, the index can make for a more reliable instrument for longer term traders. Day traders usually want bigger daily movements to capitalise on and can find indices too quiet.
Index Spread Betting and Trading Costs
The ‘spread’ is the difference between the buying and selling price. This is in effect the commission you are paying to the spread betting firm, note that most firms do not charge brokers’ fees.
Index Spread Betting Comparison
A look at the typical spreads of some of the leading companies.
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| FTSE 100 daily (spread size) |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
| Dow Jones daily (spread size) |
2 |
2 |
2 |
2 |
1 |
2 |
2 |
| DAX 30 daily (spread size) |
1 |
1 |
1 |
1 |
1 |
2 |
1 |
| Indices (min stake) |
£1 |
£1 |
£1 |
£1 |
£0.50 |
£1 |
£1 |
| Indices (more available) |
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Index spread betting may also be available with other companies - notes.
Index Spread Betting and Dividends
To find out the exact position regarding dividends, you will have to contact your spread betting company. Usually your account will be adjusted on a daily or weekly basis to make a provision for dividends.
On ‘long’ index positions your account will be credited with a percentage of dividends declared on the underlying shares. With ‘short’ positions your account will be debited a percentage of the dividends declared, ie you will have to pay a percentage of declared dividends.
Index Spread Betting and Rolling Daily Costs
Normally your spread betting company will charge you a small financing fee (interest rate charge) on ‘long’ trades that you keep open overnight. Having said that, you generally receive a small fee on short trades that you keep open overnight.
Index Spread Betting
For more on indices spread betting including daily market commentary and market analysis see:
With financial spread betting you can lose more than your original stake or investment. Spread betting carries a high level of risk to your capital. Please familiarise yourself with the risks that are involved and before trading, ensure that financial spread betting matches your investment objectives. Seek independent advice where necessary.
Index Spread Betting - edited by MJ, 10 May 2012.
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With spread betting you can lose more than your original stake or investment. Spread betting carries a high level of risk to your capital so please familiarise yourself with the risks that are involved and, before trading, ensure that spread betting matches your investment objectives. Seek independent advice where necessary.
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* Based on current UK tax law. Tax law may change and can differ depending on your personal circumstances.
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