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.