Spread betting is a very powerful tool that give traders the ability to bet on the stock market indices such as the Dow Jones Industrial Average and FTSE 100. Moreover, spread betting on indices is all but impossible to do with conventional brokers since it allows traders to take a strong position on economic trends instead of just focusing on the rare specific factors that affect the movement of the individual shares in the market. Furthermore it represents a way of utilising international opportunities not including the purchase of share on overseas stock exchange.

Spread Betting and Indices

Spread betting generally allows traders to speculate on the movement of markets – whether that’s the share markets, currency markets or any other 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 gambling.

spread betting indicesBesides FTSE and Wall Street indices there are other 50 plus indices; other countries that have their own respective indices such as Japan’s Nikkei 225, Germany’s Dax 30 and France’s CAC 40. Before considering trading indices, it is very important to understand the relevant factors that might cause your preferred index to shift in one direction or the other.

The process of betting on an index is practically the same as with an individual share. As with other forms of spread betting, there are no extra dealing charges and profits are generally tax free. When betting on indices, it is crucial to be aware of the accompanying risks that is involved in spread betting. Indices can move quickly in response to economic movement or market sentiment, hence there are certain risks of running large losses if not properly monitored.

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Why Spread Bet on Indices

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.

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.

Indices can be very volatile and therefore it’s very important to set stop-losses. Stop-losses mean that setting up a lower limit to the index of your choosing which you are betting or set up an upper limit instead if you plan on going short instead. Stop-losses are devised to automatically close the bet once a certain point is reached to limit losses.

For a relatively small premium, you could take a sufficient guaranteed stop-loss to put an unlimited limit on liabilities should the market move against your favour. Guaranteed stop-losses are an optional tool and are normally selected as an optional extra when deciding to bet on indices. The ability to bet on the price of indices whether it is going up or down offers a broad range of opportunities which represents a valuable addition to an investor’s portfolio.

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.