These are three examples as to why one may elect to get involved in Financial Spreadbetting:
Financial Spreadbetting is often used to 'hedge' an existing financial transaction i.e. to protect a position in the event that it worsened. Let's take the example of an individual, residing in the UK, who wishes to take advantage of competitive vehicle prices in Europe. A deal may be struck to buy the vehicle at say Euro20,000 and you check that the current £/Euro exchange rate is 1.4672 (i.e. Euro1.4672 = £1) so the current value of the vehicle in £'s is £13,631.41, however, the projected delivery time is some 2 months.
There is no guarantee that the £ will maintain its existing level against the Euro, so one would be quite right to consider a way of ensuring that the savings originally made by buying the car from Europe are not eroded by a worsening exchange rate.
A way to combat this situation would be Hedge your position by opening a trade in either the £ vs. Euro or Euro vs. £ dependant upon if your Spreadbetting company offer £ based currency trades or Euro based currency trades - some do one, others do both! This is how it would work.
We would prefer to use a £ based bet since the comparison is much simpler.
Firstly, we need to calculate the size of the bet. Is it £1, £2, £5 or £10? A straightforward way of doing this is to simply divide the value of the position you are trying to hedge into the currency value. So, in our example we are trying to hedge a value of £13,631.41 and the exchange rate is 1.4672 (remember that Currencies are priced in 1000's therefore 14,672.) 14,672 divided by 13631 = 1.076. We cannot bet at £1.076 per point so simply choose the nearest your Spreadbetting company will allow - lets say £1 per point.
You are Buying Euros to buy the car in two months time so to hedge the position we need to Sell Euros vs. the £ when we place our Spreadbet.
The £/Euro is currently quoted at 1.4670/1.4674 with your Spreadbetting company (i.e. the Bid Price is 1.4670 and the Offer Price is 1.4674.) Remember you Buy at the Offer Price and Sell at the Bid. You open a position at £1 per point Short at 1.4670 i.e. 14,670 on a Quarterly Contract to coincide with the delivery of the vehicle.
Two months have elapsed and it is time to take delivery of the vehicle. Now, it doesn't really matter what has happened to the exchange rate - all we are concerned about is that the total transaction costs for the vehicle and the Spreadbet are £13,631.41 - the amount we originally budgeted.
The £/Euro exchange rate is quoted at 1.3938 i.e. the £ has weakened against the Euro, the original Euro20,000 will now cost £14,394.26 (previously £13,631.41) a difference of £762.85! However, your Spreadbetting company are now quoting the £/Euro at 1.3936/1.3940 and you now close your position by Buying at £1 per point at 1.3940 for a profit of 730 points (i.e. 14,670 - 13,940 = 730) at £1 = £730 - approximately the same amount as the additional cost of the vehicle.
Of course, had the £ strengthened against the Euro then your vehicle would have been less expensive but you would have lost money on your Spreadbet should you have chosen to close it at that time. Nevertheless, you 'locked in' your original price with no risk.
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Similarly, we need to calculate the size of the bet. At £/Euro 1.4672 the Euro/£ would trade at 0.6816. Simply divide this number into the amount you wish to hedge = 13,631 divided by 6816 = 1.999 therefore £2.00 per point.
The Euro/£ is quoted at 0.6816/0.6820 by your Spreadbetting company and since you will be selling pounds and buying Euros to buy your vehicle then to hedge your position you need to Buy or go Long Euro/£. You open a position at £2 per point at 0.6820 (6820, it is in 1000's).
Now, when you take delivery of the vehicle the Euro/£ is quoted at 0.7175 and your vehicle price has risen to £14,350 (i.e. Euro20,000 x .7175) an additional £718.59! Your Spreadbetting company are now quoting Euro/£ at 0.7175/0.7178 and by closing your position at 0.7175 (Selling at £2 per point) you realise a profit of 355 points (7175 - 6820) at £2 = £710 - again offsetting the currency differential and 'locking in' your original price.
Please note that it would be virtually impossible to exactly match your loss/gain between the two transactions simply because there are too many variables involved e.g. you have to take into consideration the Spread, the value of the transactions and the fact that you are using two different entities to trade your currencies along with the fact that currency markets move quite quickly and it would extremely unlikely to close your Spreadbet position at exactly the same time as you converted £'s to Euros to purchase your vehicle. Finally it will probably impossible to place your bet at the exact level needed to make the equation match.
You could apply similar example to any similar overseas purchase e.g. buying a property in the USA or an exotic holiday, which have to be paid for at some point in the future in local currency.
Financial Spreadbetting can be a useful way of protecting an existing portfolio of shares whether this is a single holding or a basket of stocks that have been accumulated over a period of time. Typically, these stocks are bought with a view to capital appreciation and/or dividend payments.
If you anticipate there is to be a fall in the market, for whatever reason e.g. geo-political news, economic data etc. it may not be practical to sell your holdings for a variety of reasons. Maybe you will miss out on a healthy dividend payment or crystallise a Capital Gains Tax payment or indeed, broker fees and stamp duty are continually eating into your profits when you sell shares and buy them back at some later date.
How then can one protect oneself from an anticipated fall in the market without the need to sell their existing holdings?
If you hold a number of holdings then probably the easiest way to protect your position would be to consider placing a down bet on an Index. For example if the majority of the stock that you own are in the FTSE 100 and you do not wish to sell any of your holdings, then placing a down bet on the FTSE100 Index would be an ideal way to minimise any loss.
Let us say you own £20,000 of FTSE100 Stocks, the Index is Trading at 4000, you anticipate a general market fall and circumstances prevent you from wishing to sell any of your holdings. Placing a Down Bet on the FTSE100 at £5 per point would cover your position. If the Index did then fall say 10% to 3600 then you would make a profit of some 400 points @ £5 = £2000. You will more than likely have suffered some downward price movement in your portfolio to a greater or lesser extent (this is not an exact science - your stocks may not have fallen by as much as the market or may have fallen by more than the market dependant what sectors you were in etc.) Either way, you have protected your position, hopefully without loss, but certainly without additional Broker Fees, Tax Liability and retained your rights to any dividends.
It is also possible to protect a position in an individual stock. Let us say you own 5000 shares in United Utilities and you are holding this position to be entitled to receive a dividend payment in 2 months time. United Utilities are trading at the top of their trading range and you believe that the general market will fall and that the share price will be negatively affected. Instead of selling your shares simply open a Short position in your Spreadbetting account to cover your position. To fully cover your position you would need to place a bet at £50 per point. If the market does indeed fall your loss on the original share purchase is covered by your Spreadbet position. Once you believe the market will rise, simply close your Spreadbet position for a profit and hopefully United Utilities share price will recover - whatever occurs you have at least protected your position and that dividend is secure.
A speculator is a person who trades derivatives, commodities, bonds, or equities with a higher than average risk, in return for a higher than average profit potential. Speculators anticipate large price movements in either direction.
Financial Spreadbetting certainly allows the individual the opportunity to speculate. Of course, Financial Spreadbetting itself is a derivative product and is the vehicle, if you like, to trade a wide range of Markets and Instruments in one single account. Whether you wish to trade in Equities, Indices, Metals, Commodities, Currencies and many other specialized product for example in the USA, UK, Europe, Japan then that chance now exists.
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