Spread Betting Google | Trading Google Shares
The word Google has entered the English language, because of its dominance of the Internet culture that we now live in. There can be no-one reading this who has not heard of Google (GOOG), and very few people in the remotest parts of the planet who do not know of this giant. But not everyone knows that most spread betting providers will allow you to take a position on its stock price. Google is a successful global company that deals in information, first and foremost. Its revenues are primarily from delivering advertising, although it is always exploring new technological boundaries.
Google is today one of the best known companies, the company whose search engine most of us use at least once a day, Google. Since its beginning as a Stanford research project by Larry Page and Sergey Brin in 1996 Google has gone on to concur the world of online search and advertising. 13 years on Google has a market cap of over $395.42. Not bad going.
Google is the leading Internet search provider, and it provides customized advertising on its search pages. This is only a small part of its business, which includes AdWords, a program used by companies to promote their products with targeted advertising, and AdSense, a program that delivers relevant advertisements to websites.
Google has now leapfrogged Exxon and is now the second most valuable USA enterprise by market cap. Google’s market capitalization at the start of February 2014 was $395.42 billion compared with the oil company’s $392.66 billion!
In fact Google (GOOG:NDQ) makes its earnings almost exclusively by online ads with these amounting to 95% of the company’s revenues with its AdWords advertising platform contributing to over $100 million in revenue every day.
But Google has done much more than this, including notably the Google Earth program which allows computer users to view satellite photographs of anywhere on earth, and in most cases also zoom in to “street scenes”, pictures of any neighbourhood. The latest push by Google it is their Google+ program, which allows sharing online.
Google has also developed mobile applications which include searching by voice and by location, and advertisements customized for mobile phone users, including “click to call” advertisements which allow the interested consumer to easily connect with the advertiser.
The principles behind the basic Google search algorithm are jealously guarded, and constantly changed. This is partly to provide a better user experience, selecting search results which are most relevant, and also to make it difficult for website developers to know how to get their website to the first position of the search, which is obviously prized for commercial reasons.
The company is constantly developing further applications through its own devices and from acquisitions, and shows every sign of keeping ahead of the game. Its stock is a typical “growth” stock, increasing steadily in value with analysts predicting earnings growth of 16% next year to December 2013.
While these fundamentals would imply that it was a safe bet is to simply take a long position on the price, in practice of course stock prices do not go up in a straight line, but have “retracements”, or periods when the price falls back, typically regressing by a third, a half, or two thirds, according to the Fibonacci theorem of technical analysis. Unless you have a trading plan, which includes measures to limit your loss if you bet in the wrong direction, you may not make a profit from spread betting on Google.
Google can continue to deliver high double digit growth year on year then the market is going to quickly bring that PE back to mid to high teens in line with a Cisco, Intel or to a lesser degree a Microsoft or HP. Generating lots of free cash each quarter is great but what the market is really interested in is how are you going to use it to drive future revenue and profit growth, especially if you are a company that doesn’t pay a dividend.
Given the growth in value, most of your winning bets will be buy bets, and it is always considered safer to be betting in the direction of the prevailing overall trend. You should use technical analysis to assess the mood of the market, in its most basic form whether the stock is overbought (overvalued) or oversold (undervalued) at any particular time, and make your bet appropriately. You can use technical analysis to figure out target prices, based on patterns and support and resistance levels, and take care to only bet when the potential return is worth the risk.
However, beware, that should Google miss Wall Street forecasts the falls can be quite dramatic as what happened towards the start of the 2012 season when the company suffered two 8% declines in its stock price. More recently, in October 2012 Google shares fell a whopping 11% in under 10 minutes after the company reported weaker than expected advertising revenues growth and the continued under performance of its recently acquired mobile phone enterprise Motorola Mobility. This is what can happen when investors are so used to seeing increasing growth quarter on quarter.
To put this into perspective the 11% fall is equivalent to around $82 which implies a 8200 points retracement so a spread better with just a £1 per point long position in the stock would be looking at a £8200 loss. That’s the risk one faces when trading high value USA shares priced at hundreds of dollars per share.
Also, one opinion. Young growing companies normally don’t pay dividends but reinvest profits back into the business to fuel further growth in the business. But GOOG has now been making huge amounts of cash for years and instead of rewarding shareholders with dividends they just keep spending money acquiring technology enterprises. In this respect, they ARE NOT INNOVATORS, they simply buy up innovative companies.
But the giant Mountain View technology behemoth also faces other problems. The company is experiencing a slowdown in its online ad sales and hasn’t been able to adequately monetise its mobile ad sales space. Its Android operating system is now state-of-the-art and a good competitor to Apple (AAPL) iOS but Google still has to make money from selling adverts via its Android infrastructure. Google is also facing multiple patent lawsuits on several fronts and to add to this the FTC is also investigating the company for anti-trust issues. This criticism is not intended to downplay Google’s contribution to opening up a multi-trillion dollar industry arena and with all its faults our world today can really be split into just two time periods – before Google and after Google.
The question of where continued future revenue growth becomes even more important when many analysts believe it has saturated its existing online search markets and it has recently decided to all but pull out of the China – the world’s largest and fastest growing economy. While Google’s decision to pull out of China on the grounds that it didn’t agree with the Chinese government censoring its results may have gained many supporters on moral grounds including senior members of the US Government, it did little to win over analysts and investors. Most saw this as an own goal by Google, a case of it taking on a battle it could never win and one that ultimately was going to cost the company billions in potential future profits. The winner out of Google’s decision was Chinese search engine Baidu which was seen as now having a free reign to mop up the ever growing Chinese online search market.
As it searches (excuse the pun!) for new sources of revenue growth the mobile web and in particular the world of the smartphone seems to be high on Google’s radar. Closely linked to its efforts to gain a larger piece of the smartphone tidal wave Google also announced the launch of its own, the Nexus 6. While independent reviews of Nexus 6 have been largely positive to-date it appears not to have made a massive impact as regards sales. Given the competition in this market it is hard to see how the Nexus 6 is going to be Google’s next big revenue generator. Perhaps the real story here is the rise of the Android operating system, which is now the world’s most popular smartphone operating system after recently ousting the iPhone OS.
Google is not one for the faint hearted and certainly not one for novice traders. The Google share prices moves up and down faster than the energizer bunny on steroids! It often moves 500 points or more in as little as 10 or 15 minutes. Also given the very high share price means it requires a pretty large balance in your spread trading account in order to open a trade in the first place.
Spread Betting on Google (GOOG)
Google is a strong international technology company, and it has posted good gains in recent years.
It was hit in the global economic crisis of 2008, as you can see, and it faces stiff opposition from other technology giants, although it holds a unique position. The current price for a rolling daily bet is 60,460 – 60,468. As it is on the US markets, this means that one that Google share costs about $604.
If you are bullish on Google, and believe that the price will go up, then you want to place a long spreadbet. You are allowed to bet as little as 24 pence with IG Index, and this is because the numbers are so large that a one-point move is almost insignificant on the price. Say you bet 24 pence per point.
If you are right, the price might go up to 65,263 – 65,271, which as you can see is near the top Bollinger band. If technical analysis does not suggest there will be a breakout, you might want to close your bet and take your profit.
Your long spread betting position was placed at 60,468, the buying price, and it closed out at 65,263, the selling price. That means that you have made 65,263-60,468 points profit. This works out to 4795 points. As your stake was £.24 per point, you have made £1150.80.
If instead of staying in the upper Bollinger band the price fell, you would want to close your bet quickly to minimize your losses. Say it went down to 60,130 – 60,138 and you closed your bet. This time the difference in points is 60,468-60,130, which is 338 points. For your given stake, you have lost £81.12.
You could also place a futures style spreadbet on Google, and the current quoted price for seven months away is 60,711 – 60,744. This quote suggests that the market, as evaluated by your spread betting company, already thinks that the price is going up from the present one. If you agree and believe the price will go higher still than the 60,744 buying price, then you place a long bet of, say, £.60 per point.
Once again, if you are right the price might go to 63,115 – 63,123, and you could close your spread bet and collect your winnings. In this case you have won 63,115 less 60,744 points, which works out to 2371 points. For your chosen stake, you have won £1422.60.
If the price did not go up at all by the time the due date of the bet arrived, you might find that you are looking at a spread betting quote of 60,471 – 60,485. You would have to close your bet and accept your loss. This could also happen if the price went up, but did not get as far as your initial price, and then came back down.
In this case your spread bet went on at 60,744, and closed at 60,471, losing you 273 points. For your stake, you have lost a total of £163.80. Curiously, when Google floated in in 2004 at $85 a share, one newbie trader placed an order to go long at $99 at £1 a point with Capital Spreads but neglected the trade and didn’t access the account for almost a year. When she did, she was surprised to see that she had made a £20,000 gain! The price of Google shares then were trading at $300 meaning they had moved up by about 20,000 cents at a £1 a point.
Google will always be a volatile stock with the potential for big moves up or down on any given day but given the hype surrounding the company it might be best to look for alternative trades in the current market. There are many other technology stocks out there which do offer the potential for continued revenue and profit growth at rates that the market is looking for.
Google targets Microsoft – The Chrome and Android Operating Systems
But far from being a one way war with Microsoft trying to take down Google, this one has a lot more spice to it, as Google is just as eager to take down Microsoft in any way it can. While getting under Bill Gates’ skill is a bonus for the Google team in truth it is not their primary motive. In fact what they are searching for is new revenue generating opportunities which will allow it to maintain its phenomenal growth rate and help justify the massive PE the stock is currently trading at. Google started its move into the online applications space a few years back, lead by the launch of Gmail and soon followed up with Google Calendar and Google Docs. Last year Google attempted to reduce Microsoft’s dominance of the browser market with the launch of Chrome. Today Chrome is now the world’s most popular web browser with Mozilla Firefox second place.
And the logical extension for Google after the launch of Chrome was to develop its own operating system to directly go after Microsoft’s bread and butter, Windows. As it turns out Google has decided to develop not one, but two Operating Systems, and now we have the Chrome OS and the Android OS. While Google freely admits there will be some overlap between the two in short they see Chrome powering netbooks and desktops while Android will focus on the smartphone market. And the hype surrounding the recent launch of the Motorola Droid phone indicates that the Google’s Android OS is becoming a real alternative to Apple’s iPhone.
Trading Google Shares
Most of the spread trading companies require you to have a 15% margin on account in order to open a trade, so while that’s not too much of an issue if you are trading Microsoft for example, where you’d only need £450 in your account to open a £1 a tick trade, its a different story when it comes to going long or short on Google, where you’ll need to stump up close to £9000 to open the trade at Google’s current share price of close to $600 a share. So I fully understand that many traders out there may not have the margin to trade Google or even if they do, just don’t want to take on such a volatile trade. For those who have built up larger trading accounts there are some benefits to trading a stock like Google, firstly the potential upside is significant, for example anyone who went long Google at the start of July with a £1 a tick trade and applied a loose stop would now be up over £18K in less than 5 months. Secondly the volatility in the stock gives day-traders and momentum traders some excellent opportunities for short term trades.
So to some of the approaches to trading Google. From experience the one approach that really does not work is applying your normal stoploss, let’s say if Google is at $575 (57500) and you decide you want to go long and risk £500, so you put a stop 500 points below at 570000. I’ve tried this approach in the past and almost every time I was stopped out within a day or two, and sometimes within a few hours and left cursing a loss of a few hundred euro as Google reversed back in the direction of my original trade which was just stopped out. That’s just the nature of Google.
Microsoft targets Google – The Challenge of Bing
Launched earlier this summer, Bing is Microsoft’s latest attempt to move in on Google’s patch and try get it’s paws on some of the lucrative online Bing search advertising revenue. To put it in context as to how important online advertising is to Google, over 95% of it’s revenues currently come from it’s search engine and Adsense program which places Google ads on millions of websites worldwide. Described by Microsoft as a ‘Decision Engine’, Bing aims to categorise search results and help users get to useful information and features quickly. In a further effort to get Bing out there Microsoft signed a 10 year deal with Yahoo! at the end of July which would see Bing become the exclusive search engine for all Yahoo! sites in exchange for a complex revenue sharing agreement put in place.
So how is Bing doing so far? Well not too bad, after less than 6 months on the go Bing has gained 9.5% of the US online search market. It’s still a long way behind Google’s 65% share and even further behind the 81% of the global search market that Google has managed to build up over the years. To-date it looks like Bing’s success in gaining market share has largely come at the expense of Yahoo! rather than Microsoft’s primary target. As for how good the search engine itself is, well I haven’t really tried it out much so can’t say, I guess I’m a Google man at heart and while it continues to do the job for me I don’t see any reason to change. If any of you out there have become Bing fans then I’d be interested to hear why you think it works better than Google, use the comments box at the end of the post to share your thoughts.
So if you really do want to trade Google for the longer term and trade the trend so to speak then you need to use a very wide stop unless you want to be continuously stopped out only to see Google rebound a few days later and carry on to new highs. When I have being trading Google over the last few months I have looked to go long on the pullbacks (e.g. when it hit $530 at the start of the month) and put quite a wide stop in place, usually a few hundred points below the 50 day moving average. This approach has served me well over the last few months but it does require nerve and a lot of patience. The other important point is that when Google does start to move up above your entry point you really need to resist the urge to close out your position too quickly and take your profit. This is an area I personally need to work on a bit more, too often in recent months I’ve panicked and rushed to close out positions, which while profitable, really should have being much more so had I just shown more discipline and patience with the trades in question.
The second approach is really one for the day traders out there. It’s not an approach I have used too often but I do know a few full time traders who use it regularly and very successfully. Because of its volatility, Google can be a great momentum trade. There are often days when the market either rallies strongly or falls back sharply (e.g. days when the DOW rises or falls 100+ points in a day) and it is these days that Google more often than not tends to trend in the direction of the overall market. This can see it gradually rise or fall 500 to 1000 points in the space of a few hrs. The 2 minute chart below is from Monday and serves as a good example of this. Monday was a strong up day for the market as a whole and Google followed the trend right from the off. Momentum traders would use a 1 or 2 minute chart to identify and follow these trends. The example highlighted in the chart below shows how a trader could have gone long Google 10 minutes after the market opened (giving it some time to find a clear direction) at around 57800 (see green arrow). They could have kept the trade open until such time as they saw the upward trend starting to fade and drop back, deciding to close once the 20 day moving average was crossed, at a price of 58500 (see blue arrow). Such a trade would see them close out with a £700 profit for a trade that lasted a little over 1 hour. This type of trading strategy requires you to be in a position to keep a close eye on your trade and being ready to act quickly to close out and lock in your profits. You also need to be ready to use a very tight stop (maybe 200 pts below) with this approach and be willing to take your loss if the trade does not work out as planned early on. Another tip for this type of short term trade on a volatile “Google” type stock is to always close out your position before the market closes, regardless of whether you are up or down at the time. These are not the types of trade you want to be holding over night because you have no way of knowing where the stock will open up the next morning. It can often gap up or down, leaving the short-term trader nursing much larger loses than originally planned for when they opened the trade the day before.
So there are two approaches to trading Google which hopefully will help those brave enough to take this bad boy on.
Join the discussion