Financial spread betting on small cap shares carries an exceptional mix of reward and risk. This is basically due to the wide spreads and extreme volatility on the small cap quoted shares (caps £1,000,000) within the FTSE and Alternative Investment Market. A few guidelines to follow if you wish to spread bet on these small cap shares is outlined below.
If you do wish to spread bet small cap shares, please keep in mind that buying and selling quickly could be risky, due to the smaller trading volumes. Quite often these share prices tend to move at a much slower pace, and you may have a tougher time trying to exit these trades quickly. Liquidity in this type of market is generally can cause havoc in the trade. Also to note that with narrower spreads, brokers tend to require much higher margins.
It is without doubt important to follow current news channels, as both good and bad news tends to be the main influencer’s in prices changes on small cap shares. Where most spread bettors will be able to use analysis and technical data for their indicators on prices movements on larger shares, small cap shares are not influenced in the same manner.
Small cap shares through the AIM are quoted though Market Makers using the market maker system. Spread betters should watch for wider spreads. Wider spreads indicate larger price movements, and that is what is needed to profit from spread better. Generally, less market makers and smaller liquidity on individual stocks will result in much wider spreads, and provide a route for more profit.
If you wish to use stop loss options to minimise your risk exposure, you must use extreme caution so you do not accidentally get ‘stopped-out’. Alternative Investment Market (AIM) shares tend to be vulnerable to high levels of volatility, with that said, it can be a good thing if you are on the correct side of the trade. Placing your stop losses correctly requires one to carefully examine their position. If the stop loss are placed incorrectly, or too close to the buy / sell price, they can easily be stopped-out. To add to this gapping can occur if the price movements fluctuate too quickly and the spread betting broker is not able to initiate the stop loss order at the spread betters price.
The VIX is also known to many as the’ fear index’ or ‘fear gauge’, and it in actuality a volatility index. The VIX is used to measure the 30 day S & P 500 volatility of implied S & P options. It is quoted in percentage points and will then be approximated into the projected movement of the S & P 500 index over the up coming 30 day period, which in turn is annualised.
By using the VIX investors can trade volatility without the necessity of factoring price shifts of the underlying.
Traders whom are looking for a risk management tool, will often use the VIX to hedge their investment portfolios from rapid market decline. The VIX is also used as an important tool to speculate how volatility will move in the future.
The VIX is an important tool for Binary Options/Betting traders.
A Binary Bet/Option is an all or nothing bet, and it is based upon the depending on the arranged price of the underlying product and is relative to the strike price. The Binary Call option will pay a fixed cash amount if the underlying index is at/or above the strike amount, or nothing at all if it is below the strike amount at expiration of the contract. The Binary Put option will pay a fixed cash amount if the underlying index is below the strike amount, or nothing at all if it is above at the expiration of the contract.
These days “Rolling Spread Bets” have become quite popular and are popular amongst day traders as well as the short term trader. Typically this type of be is open-ended, and will be revalued at the close price each day. This allows the trader to close their bet when they choose. In the even the spread bet is open after close of the trading day, finance charges will be incurred.
Here is an example of what a Rolling Spread Bet would look like for a short term trade.
The JohnStarker* future is trading at 12143 – 12145; you are able to sell at 12143 or buy at 12145.
- We feel the market is going to rise and we will risk £5 per point and buy.
- The market rises, and our speculation was correct, we now close our bet.
- The price quoted at the close is 12193 – 12195.
- We place our sell trade of £5 per point on price 12193.
- To calculate our profit we take our sell price of 12193 less our buy price of 12145. 12193-12145 = 48 points.
- Our profit is therefore 48 x £5 = £240
- We feel the market is going to fall and we will risk £5 per point and sell.
- Our speculation is wrong, and the market rises, and we are going to close the bet to avoid more loss if the market falls further.
- The price quoted at the close is 12193 – 12195.
- We place our buy trade of £5 per point on price 12195.
- To calculate our loss we take our sell price of 12143 and deduct our buy price 12195. 12143-12195 = -52 points.
- Our loss is therefore 52 x £5 = £260
Spread betting on a sector allows the investor to open their position on a sector/market as opposed to taking a position on an individual stock’s performance. This strategy is one way for a trader to gain exposure to a larger area of the underlying stock, and also helps to diversify one’s risk.
Generally the most common sectors are: Mining, Banking, Food and Drug Retailers, Food Producers, Technology, Pharmaceuticals, Mining, Chemicals, Telecommunication, Precious Metals, etc. It is best to check with your spread betting broker to see what sectors they offer.
When spread betting on sectors, one of the most commonly used approaches is fundamental analysis. Similar to stock trading, it is advised that you use the PEG ratio and Price to Earnings Ratios to discover the sectors valuation.
PEG Ratio: This stands for Price Earnings to Growth Ratio. To find the PEG ratio of a given stock you would use the price to earnings ratio and then divide it by taking the stocks’ rate for earnings over a set time period. This fundamental analysis is used to help ascertain the stocks’ /company’s earnings growth. If using the PEG Ratio for sectors spread betting you would be analysing the growth rate and earnings of the sector. This is used often as an indicator of the potential value of the sector.
Price to Earnings Ratio: (PE Ratio) – One of the most common metrics used in fundamental analysis it measures the current stock or sector price relative to what the predicated earnings are for the particular stock or sector.
One should not use this data only to form their predictions, other indicators which should be taken into account would be the evaluation of a comparable ratio in the market. As an example you may compare the sector’s price to earnings ratio to the price to earnings ratio of the FTSE 350 index. By doing so, it may help you to determine if the sector is under or over valued.
Social media is changing the way on how people trade and transact their business. A recent study by the Massachusetts Institutes of Technology revealed that copy trading performs much better than manual trading since the latter proves to be very difficult for those constricted by time. With a lot of new traders exploring their luck in the trading industry. According to the New York Times, regulators have found that approximately 9/10 traders will lose their money on their first major trade. Hence, with the advent of social trading, it will definitely revolutionise the existing scenario.
Utilisting this strategy whilst spread betting provides various benefits. These benefits are basically threefold: first you can capitalise on performance and knowledge of other traders and replicate them even without prior concepts. Secondly, it opens up a dialogue between newbie and expert traders and finally, it brings transparency to what has historically been a very forted industry.
Figures show that 70 % of people who use this strategy through Facebook are those between 18-34 which pretty much are the “Generation Y”. Theirs is a social internet and pretty much not a financial trading experience. The negative implications, however, of social trading is that there is the high risk and real fear of traditional investors regarding a breach of privacy.
The sheep mentality of course is not entirely true in this scenario. If found out that individual traders who trade using this platform earn about 4 % on average on their own. The largest misconception surrounding platforms is that such platforms do not provide professional tools. Basically, what these platform do is offer extensions of what traders already have at their disposal.
Although this platform has significantly changed how responsible people trade, what we actually see is that more people who tend to follow an individual investor the more the former becomes responsible as they follow the ways of a responsible trader.
When it comes to concerns regarding the future of social media trading, much can be said that it will eventually become the mass market form of trading in the near future. Few people trade the active markets at present because they find platforms quite scary at first, and social trading will eventually tear down those boundaries limiting new traders.