Spread Betting on Diageo’s Share Price
DIAGEO (DGE) may be possibly one name you have never heard of but not so for its brand names! FTSE 100 constituent Diageo is a major producer of alcoholic drinks, and it was formed in 1997 when Guinness and Grand Metropolitan merged. Premium alcoholic drinks giant Diageo (DGE) benefits from a strong portfolio of spirit, beer and wine brands providing a welcome relief for Londoners and beyond during times of economic turmoil. It is currently making terrific profits from expanding into the emerging markets, which has led some commentators to question its commitment to the home market, particularly as various tax moves and factory closings have been mooted.
Controversy aside, Diageo is the 12th largest company on the London Stock Exchange with a market capitalisation of about £49.5 billion, and is also listed on the New York Stock Exchange. It is the world’s largest premium drinks business and has a number of leading alcohol brands, including Johnnie Walker Scotch Whisky, Baileys liqueur, Captain Morgan, Guinness Stout, and Smirnoff Vodka, all of them the world’s best-selling brands in their particular classification. In addition, it is the exclusive international distributor for José Cuervo Tequila, and owns a third of Moët Hennessy, the company that includes Moët & Chandon champagne and Hennessy brandy.
The list of alcoholic drinks goes on, including other beers such as Harp Lager, other scotches such as J and B, Bell’s, Vat 69, gins such as Gordon’s, Tanqueray, Booth’s, rum including Capt. Morgan, Canadian whiskey such as Crown Royal and Seagram’s, and many others. It is a stock that you could get excited about, particularly as the economic situation seems to have driven many people to drink.
But it is the expansion into other markets which is exciting the revenues and therefore the stock price. The booming economies of Africa, Latin America, and the Asia-Pacific region have fuelled the latest growth, and Diageo executives believe that developing economies will contribute half of the sales within the next few years as increasingly affluent consumers wet their appetite for premium beers and spirits. The company also has the financial strength to boost earnings by acquisitions. Important acquisitions include the £1.3 billion takeover of Mey Icki in Turkey, as well as investments made in Chinese white spirits company ShuiJingFang. Western Europe, on the other hand, is declining simply because consumer spending is being hit with rising unemployment and higher taxes. From a spread betting perspective, the explosive growth will be alternated with periods of consolidation, providing opportunities to profit.
Spread Bet on Diageo Shares: Rolling Daily
As an internationally famous alcoholic beverages company, Diageo has been expanding into the emerging markets while the economy of Western Europe is languishing, and this has meant that the stock has experienced strong growth recently. The current price for a rolling daily spread bet is 1567.9 – 1571.1. It was half that value in 2005, and again in 2009 in response to the global economic crisis.
If you think that the strong growth is going to continue, you could make a buy spreadbet for £3.50 per point. The long bet would go on at the buying price of 1571.1. After a few weeks, you might decide to close the spread bet if the price reached 1726.0 – 1729.2. The spread trade closes at the selling price of 1726.0, so the number of points gained is 1726.0-1571.1, which is 154.9. With a bet of £3.50 per point, your profit would be £542.15. Against this, your account may have been charged a small amount each evening when the bet rolled over, but it is not likely to be large.
Of course, your spread bet might be wrong and the price could go down. If it does, at some point you will need to close the spread trade for a loss, just to prevent losing any more. Say you closed the trade when the quote from your spread betting provider was 1432.6 – 1435.8. The bet was originally opened at 1571.1 and closed at 1432.6, a difference of 138.5 points. For your chosen stake, this amounts to £484.75.
Another way that the bet might be closed to minimize your loss is by putting a stop loss order in place when you open the bet. In this case your provider will close the bet for you when you reach a certain level of loss, say when the price drops to 1486.2 – 1489.4. 1571.1 less 1486.2 is 84.9 points, so your loss is kept down to £297.15.
Diageo Futures Betting
Futures based bets can work out better if you’re not sure how long you need to hold a spread bet open in order to get to the profit level that you expect. While rolling daily bets have a charge made each evening to your account, you can hold a futures based bet until the expiration at no cost. The current price for Diageo futures for the mid-quarter, five months away is 1570.9 – 1582.9. If you’re feeling bullish about this stock, you could stake £6 per point that it will go up. Your spread bet goes on at 1582.9, the buying price.
Supposing that you are right, and the price goes up to 1742.6 – 1753.2 at which point you decide to collect your winnings, you can easily work out how much it is worth. Your bet was placed at 1582.9, and it closed at the selling price of 1742.6, a gain of 159.7 points. If you multiply that by the stake, you find that you have won £958.20.
But prices can go down as well as up, so you must be prepared to close your bet for a loss before it falls too far. Say it went down to 1445.0 – 1456.2 and you decided to accept your loss. This time your bet closed at the price of 1445.0, and taking this off the starting price of 1582.9 shows you lost 137.9 points. That’s a loss of £827.40.
Many spread traders decide to use a stop loss order whenever they place a spread bet or other trade. The stop loss order tells your spread betting broker to close the bet when it is losing by a certain amount. Perhaps this closed your trade for you when the price was 1492.5 – 1503.6. In this case, you have lost 1582.9-1492.5, which is 90.4 points. Multiplying by your stake of £6 per point, your total loss is £542.40.
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