Tips for Spread Betting the Indices

1. Stock Index Futures Contracts came to the UK in 1982, having proved successful in North America.
2. An index value is created by compiling a number of stock prices into one total value, and expressing the value against a base value from a specific date, thus allowing investors to easily follow the performance of certain groups of stocks (usually a certain number of leading stocks from a given stock market).
3. Indices are often used as a barometer of sections of the economy. Remember though that what they truly reflectat any one moment in time is sentiment. For instance the FTSE is a snapshot of how main industries within the UK are faring. Indices show us a picture of the whole economy, rather than a single company.
4. NYSE Euronext now compiles, computes and publishes the CAC 40 (France), Bel 20 (Belgium), AEX (Netherlands) and PSI 20 (Portugal) while also setting trades for the Belgian, Frence and Dutch cash markets. Germany’s main Dax 30 index is serviced by the Deutsche Boerse while Italy’s MIB-30 is now part of the London Stock Exchange Group (LSE) following 2007’s takeover.
5. Index spread betting is hugely popular with ETX Capital estimating that 50% of the trading volume they see going on indices.
6. Is is worth noting that spread betting providers don’t use the direct reference names for the indices due to trademark issues. They don’t have the legal rights to use terminology such as Dow Jones, DAX Index etc. Hence the use of Wall Street and Germany etc.
7. Most index spread bets are not on a stock market index itself, but on the futures contract. This is not only convenient in that it provides a standard ready-made markets that’s the same for everyone across the industry but the spread betting providers can also price a market faster and with greater confidence if they can take the quotes directly from the exchange. Lastly, and perhaps more importantly this provides the spread betting firms with a means of hedging in that they can trade the futures contract for their own account if their liabilities move outside acceptable limits. Indeed, most spread bets actually end up aggregated and hedged directly into the futures market.
8. Bets on indices appeal to speculators, technical traders who watch technical charts and to an increasing number of retail investors who believe they can see a big market move but do not want to disturb their underlying share portfolio.
9. Trading indices may be a safer strategy if you’re looking into emerging markets as it is easier to take a decision on where a whole market is going than an individual stock. This is because if you’re looking overseas picking out individual stocks in illiquid markets can be dangerous…
10. Plus, and this is a critical point, the spread on the main indices tend to be lower than on any other markets. Capital Spreads, for instance only charges a 1 point on the FTSE Rolling Daily.
11. The majority of bets are placed on the FTSE 100 index and the Dow Jones. The FTSE normally trades within a high-low range of 60 points while for the Dow Jones this is closer to 100 points. Obviously in volatile conditions both indices may move much more (say up to 3 times their daily averages).
12. Other financial indices that can be traded include the FTSE 100, Dow Jones, S&P 500 Index, Nasdaq, DAX, CAC40, MIB 30, Nikkei 225 and about every major index that you can think of. A number of the firms use colloquial terms for some of the indices, for instance calling the Dow Jones Industrials ‘New York’ or the DAX ‘Germany’.
13. Not only that but the indices themselves can be broken into parts – for instance the FTSE can be traded in the following: FTSE100, Daily FTSE Index, Daily FTSE Futures, FTSE 250 and so on. The FTSE 100 comprises the largest 100 companies quoted on the London Stock Exchange, likewise the Footsie 250 is the top 250 companies and not 100.
14. Contracts are available daily, weekly, monthly or the standard 3-month contracts (note that not all spread betting providers offer weekly and monthly products). Some others also offer a rolling product.
15. In the last few months the major indices such as the Dow and FTSE have been experiencing big moves of 3% or more which open the possibility of making quick profits from a spread bet position. As the wild swings are mainly sentiment driven it makes sense to use technical analysis to predict the short-term market direction.
16. Each index has its own pecularities so it pays to follow an index market for sometime before diving in. For instance the ASX tends to make its major moves in the morning. After lunch, profit-takers or alternatively the bargain-hunters move in. This makes buying spread bets or CFDs at the right price tricky. Buy in the morning and you’re likely to pay too much, with a loss to face by late afternoon. If you want to wait until the overnight results from Europe, try putting in an order before the market opens.
17. The Dow is one of the most popular markets as it is one which is talked about a lot and you can deal in it in whole points rather than tenths as with the S&P 500. The typical minimum bet on the S&P 500 is usually £1 per tenth of a point with the margin somewhere in the region of 60 times the stake. Take into account that the S&P 500 had an average daily range of 25 points this year.
18. With regards to what moves the Dow Jones, the most important trading period is usually during or immediately after the USA trading session, which comes to an end at 9pm UK time. The bulk of the USA economic data will have been released before the stock market opening at 2.30pm UK time, or immediately after at around 3pm. USA Federal news releases tend to be issued at about 7pm or 7.15pm GMT while corporate announcements can be released at any time. The non-farm payroll data released on the first Friday of each month is particularly important.
19. Beware of key psychological levels when trading indices. If such a level is breached it can result in significant volatility in the underlying index market. For instance at the time of writing the FTSE 4500 level is a major support level meaning that lots of stop and limit orders are placed around the 4500 point, so as the market approaches this area a significant number of orders are triggered resulting in abnormal volatility.
20. Many people start dealing in indices having traded stocks successfully for years. Most go back to trading stocks because spread betting indices is a completely different ball game with a completely different set of rules. If you are starting with a £500 pot, even £1 per point is too much leverage. You will be surprised at how quick you can lose it. Most people tend to double it first, then get confident, then lose it all. The accepted rule is not to risk more than 1% to 2% of your pot on any given trade.

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