Spread betting shares

Spread betting shares and equities in general, is another very large and popular market for the spread betting companies, and one that I trade in from time to time, generally on a longer term basis and once I have identified stocks or shares that I feel are in a long term trend from a technical perspective on the daily or weekly chart. Indeed spread betting shares is often one of the first markets that traders, new to financial spread betting, start with initially, probably as it is the market many traders understand, having bought and sold shares at some point in the cash market.However spread betting shares is very different from owning the shares themself, and many of the concepts are confusing for the novice.

In terms of the shares quoted, most of the established spread betting companies will offer several hundred if not several thousand of the major UK and US equities as spread bets. Typically in the UK this covers the FTSE 100, ftse 250 and ftse 350 constituents along with the AIM market, and in the US, this will include the DOW 30, the S & P 500 and the NASDAQ. The dealing spread offered will generally vary depending on whether the bet is a daily one, near quarter or far quarter and typically the spread will be around 0.1% for a daily bet, 0.2% for a near quarter and 0.4% for a far quarter. Shares are also categorised depending on their underlying volatility which in turn will affect how close you are able to place a stop loss on any trade or position. FTSE 100 shares will typically have a volatility rating of around 0.3% and a minimum stop distance of 5%. US stocks are also generally classified as low volatility but the minimum stop distance will be greater at around 10% for stocks where the spread betting company offers controlled risk bets, such as IG index.

One of my favourite spread trading strategies for spread betting shares is to use the concept of pairs trading. Using this strategy I look for two shares which correlate positively, but where I feel that one is undervalued in respect of the other. Typical examples might be two oil companies for example BP and Shell), or two large supermarket chains such as Tesco and Sainsbury. Having identified the share we feel will perform better, then we place a long spread bet on each share, which provides us with a hedged position. However in placing the bet we need to make sure that the trade is balanced, so that any move in one will equate to an equal move in the other, so if one share is trading at £4.00 per share and the other is at £6.00 per share, then our bet amount must be factored by 3/2 so that we have balanced spread bet, which is now weighted correctly. Should our preferred share outperform the other and a gap in the two develop, then we would profit from the difference, having entered a hedged trade on two shares. You can find out more by visiting another of my specialist spread betting sites which covers spread betting strategies in detail.

Finally as I have outlined elsewhere, always try to convert any spread betting position into an equivalent in the underlying cash market when spread betting shares. So if you are trading at £10 per 1p movement, this is equivalent to holding 1000 shares. Would you be so confident in your analysis if you were physically holding a 1000 shares, perhaps with a value of £4 or £5 each – this is the position you are holding with your £10 per 1p spread bet – and remember that unlike your ‘conventional’ holding of a share, you have no right to any dividends to offset any fall in the share price, and in addition if you decide to roll your daily rolling contract you will start to add financing charges to your position. Financing charges of a few pence may be small to start with, but soon build as you hold your positions longer term in the hope of a recovery from a potential loss position. Spread betting shares in a spread betting account, is very, very, different from buying and selling the real thing – so understand the risks and the costs before you start, otherwise you will be in for a nasty surprise.