Spread betting generally allows traders to speculate on the movement of markets – whether that’s the stock markets, currency markets or football markets. The content of the index (i.e. the subject matter traded or used as the basis for computing figures) is largely irrelevant as far as the mechanisms of spread betting are concerned, for it is only the availability of a market that gives rise to the ability to spread bet. The advantage of the financial component for traders is that data from the direct markets can be analysed and interpreted to give trading indicators, alongside interpretations about the impact of news events and current affairs, giving traders a more realistic chance of finding logical patterns to market behaviour, and it is this (significant) skill and knowledge distinction that sets financial spread betting aside from sports spread betting, or raw gambling.
Indices are useful for spread bettors because they behave in certain ways. If demand rises, so will the index, because more people are looking to buy in from a limited supply. If supply rises (or demand falls), the market will fall because there will be a glut of access to the market, in the form of more shares, more oil, or whatever the basis of the market may be. Markets also tend to be cyclical, with the natural optimism and pessimism of different traders and funds playing in to give a collective mentality, and collective behaviour for the market, which makes it possible for traders to call future movements with some, albeit slight, degree of predictability.
Why Spread Bet on Indices
As far as trading an index in its entirety is concerned, say for example the FTSE100, the options for trading outside of spread betting are fairly limited. Generally, indices are used for investment purposes rather than trading, and because the index itself is comprised of a collection of differently prices markets with no single representative product to buy or sell, traders are often left to speculate on individual components of the wider index, such as shares. There is an alternative of course, in the form of representative funds, which are normally sold off-exchange for longer term investment purposes, but these are usually only representative of a bundle of stocks, cannot be resold easily and tend to be rather modest in returns by spread betting standards.
In contrast, spread betting allows you to take a position in favour of or against an index in totality, so long as it is quoted as a basis for trading by your broker. This allows greater flexibility in that traders can effectively make an investment decision on the back of wider market considerations, such as whether the UK economy as a whole will perform well on a particular day, giving traders a broader range of tools and investment opportunities at their disposal. All the while, the usual suspect – leverage – creeps in to make spread betting a much more favourable and accessible way of trading the markets on the whole.
How To Spread Bet on Indices
Spread betting on indices requires an appreciation of how indices are comprised. Indices such as the FTSE100 are a collection of shares (i.e. assets) which are individually priced and indexed to give an index price. There is nothing to buy or sell, so indices aren’t traded per se – after all, who would serve as the counterparty to transactions in market instruments without any tangible rights changing hands. Because the index doesn’t actually exist as an asset, it is more difficult to trade directly, but can nevertheless provide a useful basis on which spread betting can take place.
When spread betting on an index rather than in an individual stock or asset, you need to have consideration for a wider number of factors. Global economies never stand still, and there are constantly economic and news factors that play in to how a particular economy is performing, in addition to individual performances which can help bolster the index. It might be the case that while the UK economy posts some strong economic results, one particular business failure could upset the applecart and cause the index to fall. It’s all about confidence and the perception of other traders’ behaviour, with value-to-price ration very much a secondary, longer-term consideration. Remember, when you’re on the lookout for short-term profit opportunities (as is constantly the case in spread betting), you can’t afford to tie up your capital in shallow, slow moving markets – you need to find the opportunity for a quick, imminent market rise or fall in order to best capitalise.