Strategies: Good Uses of a Spreadbet (Part 1)
# Take part in all the IPOs you want
If, and when, internet search engine Facebook finally goes public, you can bet it will be oversubscribed. And small investors from the UK will come very, very low down the list of participants, as far as US brokers are concerned. That’s where spread betting comes in. You will be able to take out a spread bet on Facebook’s price on the ‘grey’ market, before its shares start trading publicly. You can do this for most new share issues. For example, Cantor Index has been making a market on the closing price of Cambridge Silicon Radio at the end of its first day of trading. A spread bet can also be safer than trying to buy the shares.
Very occasionally, a company will decide to double the number of shares it issues at short notice, which could hammer a conventional investor. To protect yourself against that, you can take out a spread bet on the market capitalisation of the company on the first day after floating.
# Trade on the move
Spread betting needn’t chain you to a desk every hour of the trading day. Mobile phones and personal digital assistants (PDAs) give you real-time share prices and the ability to execute trades – incorporating stop-losses, if you wish – wherever you happen to be. Cantor Index led the way with its XDA (a beefed-up PDA), while Ayondo and ETX Capital now have both launched mobile trading with live streamed prices.
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# Exploit investment trusts trading at discounts
Most investment trusts trade at a discount to their net asset value (NAV), most of the time. And very wide discounts can be a good buy signal. If you think that the discount will narrow, you can simply buy shares in the investment trust. But you can still lose out if the discount narrows, but the value of the underlying assets also falls. With spread bets, however, you can avoid this risk. If a particular investment trust tracks a sector, or has a high correlation with it, you can go long of the trust and short of the sector. That way, you will focus your exposure on a narrowing of the discount, regardless of what happens in the wider market.
# Play the mergers and acquisitions market
When Comcast made a surprise bid for Disney in early February, shares in the former came under pressure, while shares in the latter surged. It was a fairly predictable reaction. People speculated that Comcast may be drawn into a bidding war for Disney, and that whoever finally buys the company will overpay. Spread betting allows you to trade in and out of the takeover target, and the bidder, quickly and cheaply.
# Become a day trader
Stamp duty of 0.5 per cent is liable every time you buy a UK share. You only have to compound that 20 or 30 times for it to take a huge chunk out of your capital. So successful day trading is almost impossible through conventional share dealing. But because spread bets are exempt from stamp duty, your chances of making a living from day trading are appreciably better.
# Get exposure to UK and US markets in a single trade
ETX Capital’s FTSE/S&P Combo is a weighted spread bet of the leading indices in the UK and US. It is calculated as the sum of the S&P 500, and twice the FTSE 100 (currently around 15,800).
# Get free technical analysis software
Spread betting and charting go together like hand in glove. The providers compete to attract the technical analysts by building charting packages into their websites. The software will be free to use, but don’t expect anything as sophisticated as the bespoke packages that cost hundreds of pounds.
# Place a bet on the London economy
IG Index’s London house price spread bet gives a rare chance to speculate on the health of the capital’s economy. And given that very few estate agents are listed companies (and those that are form tiny parts of big financial groups), a house price spread bet is one of the few ways to share in the fortunes (and risks) of property middlemen.
# Speculate on the price of oil
You can now go long or short of oil from your computer, from your home office, or from your mobile phone. Be warned, though, that this is one of the most liquid markets in the world, with thousands of experienced traders around the world vying to make money. But if you fancy your chances, you can sign up and make trades within minutes, illustrating once more the speed and flexibility of financial spread betting.
# Combine crude oil plays with punts on oil stocks
The correlation between oil prices and oil stocks in the short term is next to zero – they just don’t move in line with each other. That’s because a high oil price has often been linked with a weak global economy, turning investors off equities in general. And anyway, share prices are supposed to reflect long-run dividend prospects, not all-over-the-place oil prices.
But, the longer oil stays high – and above the $18 a barrel yardstick that most companies use to calculate average returns – the more cash will be shoved into a company’s coffers. If an oil company runs into a spot of bother (as Shell did in January with its reserve accounting), the disparity between high oil prices and low oil shares may tempt people to bet that the gap will narrow. So you could profit from this hunch by shorting oil and going long of Shell.
# Mitigate liquidity risk on small gold stocks
A small-cap gold miner may take 10 years to turn great geophysical data into hard cash. In the meantime, that calls for great patience from investors, or perfect timing. The problem is that small mining stocks can be very illiquid. They will peak and trough on the tiniest of news flow. Small stocks also trade on wider spreads. Getting in and out will be costly. And in the meantime, the price of gold may go through all kinds of cycles. Gold spread bets may offer a partial solution. You can trade in and out of them, as a proxy for the gold miner itself.
# Make capitalisation plays
In 2003, UK equities rose by 21 per cent – peanuts compared with the Hoare Govett Small Company Index, which rose by 43 per cent. But had you backed the smallest 1 per cent of companies by market capitalisation, your returns would have been 61 per cent (based on the MicroCap Index, figures from ABN Amro’s Global Investment Returns Yearbook 2004). It has been a similar story across the industrialised world. Whether you think the trend can continue, or mean revert, you can use spread bets to back small-caps over large-caps, over mid-caps – or any combination.
# Rotate sectors
You don’t need a huge portfolio of shares to make strategic decisions about sectors. By taking out spread bets on entire FTSE sectors, you can move in and out of pharmaceuticals, banking or telecoms, as you wish. CMC Markets and IG Index offer spread bets on the main FTSE sectors.
# Spread bet on Exchange-Traded Funds
There are over 280 exchange-traded funds (ETFs) around the world, tracking everything from internet retailers to emerging markets. Unfortunately, not all of them are easy to access for UK investors. Spread betting on ETFs not only gives you access to the full range of products, but also lets you go short.
# Be bearish or bullish about the corporate bond market
One of the ETFs you could spread bet on is the iShares GS $InveTops Corporate Bond Fund. It’s designed to reflect the US corporate bond market (investment-grade only, Bloomberg ticker LQD).
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