Summarising all that into one sentence: a stock exiting the FTSE is going to drop in price and a stock entering it is going to rise. In the short term at least. Changes to the Dow, in particular, are few and far between… Imagine having a short position on the Dow Jones, which is constituted of 30 of the largest companies trading in the USA, and 12 of them pay their dividend on a particular day. The Dow might have fallen on this day and you might have mistakenly thought that you would be ahead, but instead the dividends wiped out your profit.
So if you want to skip on to Lesson 4 be my guest. So take a few minutes to remind yourself with the relevant bits of the What Is A Dividend post. Well an index is just a basket of stocks. The size of the payment is determined by the weighting of the stock in the index. Both are pretty small though. Also although there will be a cash adjustment in your account, in reality it makes no difference to your wealth. This is because, just like a share price falls when it pays a dividend, so an index price also falls when the stocks it contains goes ex-div.
So what you end up with on an ex-div date is: If you are long you receive a dividend — but you lose a bit as the price of the index falls. If you are short you paid a dividend — but you gain a bit as the price of the index falls. As I said at the beginning, the end result is little or no difference to your wealth. A useful tool to understand a bit more about what is moving a market is a heat map. It shows which sectors that are having the most impact on an index price.
Digital Look have a free one, although you have to register. Also take note: it shows movement across all stocks, not just those in a particular index. Having said that with indices there is less need for scrupulous analysis of individual companies balance sheets and cash flows and as such technical analysis is even more important here.
Since indices are a basket of stocks, their very nature means that big rises in particular constituents tend to be offset by market laggards. This makes indices less predictable in turbulent markets. These rallies can be partly attributed to an improving economic picture but mostly the support is coming from central banks. What affects Indices? Indices are affected predominately by the performance of the stocks listed on them, so in a sense, the internal and external factors that affect share prices will affect the wider markets.
If, for example, the technology industry is booming while the financial sector is struggling, then indices that are more heavily weighted in technology stocks may perform better. Similarly, if there are economic problems in the US, then indices in the country may fall further than those in other countries where the economic situation is better.
Of course there is no exact science, and indices can also be affected by rumour, hype, speculation and investor confidence, as well as global events such as terrorist attacks, political instability and conflict. It is therefore essential when spread betting on indices to keep a close eye on current affairs and economic news, as almost anything could have an impact on your chosen market.
There is no direct commission on trading index spread bets with providers simply adding a little extra on the market spread. Spread Betting Just as with betting on a horse race or sporting event, spread bettors win or lose money based upon the outcome of the bet, though spread betting is not an all-or-nothing proposition like sports betting. In sports betting, the spread refers to a minimum margin of victory. In financial spread betting, there is no such minimum, though bettors must buy-in at the ask price the higher price and sell at the bid price the lower price , and that difference is called the entry spread and represents a built-in loss that must be overcome to have a profitable bet.
Spread Betting vs. Spread Trading Likewise, spread betting and spread trading may sound similar, but they are very different. Spread trading involves simultaneously buying and selling related financial instruments to profit from a change in the underlying difference in value the spread between the instruments. This difference is the profit margin for processing soybeans into soybean meal and soybean oil and it can shrink or expand for a variety of reasons.
How Spread Betting Works Spread betting works like this: Step 1: Bettor Chooses a Security The would-be bettor decides what security they wish to bet on from among those offered by a spread betting company. Step 2: Bettor Chooses a Stake Size The bettor then decides on the stake size—how much they want to bet on each point, or the minimum movement in the security price. A point will typically be equal to a penny per share for a stock and a point for a stock index futures contract but can vary for other instruments like commodities.
Step 5: Bet Is Executed Once the minimum margin is in place, the bet is executed, with the bettor paying the worse of the offered spread buying at the higher ask price or selling at the lower bid price. The bettor can end the bet at any time, doing so by reversing the transaction selling at the bid price or buying at the ask price.
About Spread Durations Spread bets have durations. Generally, bets either expire at the end of the day or at the end of a quarterly period more typical with futures contracts. End of a Quarterly Period: Quarterly bets will often have wider spreads but lower financing costs. Any bet can be closed early without penalty. Example of a Spread Bet Now consider that transaction as a spread bet. That cost would be incurred every day the trade was open while acquiring the shares for cash would incur no day-to-day costs.
Managing Spread Betting Risk Since spread betting involves large amounts of leverage, risk control is a key concern and a key element to long-term success. Setting maximum allowable losses is a useful strategy for limiting risk and can be achieved through stop loss and guaranteed stop loss orders. A stop loss order allows a spread bettor to limit risk by establishing a predetermined price at which the broker will close the transaction.
Many brokers require stop orders on every trade, and that may include an automatic stop loss order entered when the initial transaction is executed. Tip: Stop loss orders do not offer perfect protection. When the specified price is reached, the stop loss order becomes a market order and there can be slippage between the price of the stop loss and the actual price at which the transaction is closed out — this slippage can be larger in periods of elevated volatility and is also influenced by how quickly the spread betting broker executes transactions.
Spread betting companies require bettors to pay an additional fee for a guaranteed stop loss order, and that payment may be charged on the front end of the transaction so the participant pays the premium whether or not the guaranteed stop loss order is executed or only if executed.
The cost of a GSLO is usually expressed as a multiple of the stake or a percentage of the notional trade value. Advantage of Spread Betting Spread betting is essentially a way to make highly leveraged directional bets on markets, stocks, commodities, and other securities.
While this is often touted as a major advantage of spread betting, the high degree of margin can quickly lead to significant losses. Lower Limits: Participants are also not subject to the same limits on marginable securities or minimum transaction sizes. While a U. No Charged Commissions: Spread betting companies like to focus on the fact that spread bettors are not charged commissions, but this does not mean that betting is free.
Bettors have to pay the entry spread buying at the ask and selling at the bid and that spread is determined by the company. Depending upon the size of the spread and frequency of trading, bettors may pay more in entry spreads than they would in commissions, but spread betting companies do compete on the tightness of the spreads they offer.
Favorable Tax Treatment: Many countries have favorable tax treatment for this type of transaction. In the United Kingdom, for instance, the profits from spread betting are not subject to capital gains taxes or stamp duties. That benefit is mitigated by the fact that losses are not tax-deductible. Access to Specific Financial Products: It allows participants to access financial products that may not otherwise be available, including stocks listed on foreign exchanges and derivative instruments like futures contracts that may otherwise have substantial minimum investment requirements.
Spread betting got its start in the U. Practically speaking, the only limits on spread betting are what spread betting companies are willing to offer, so spread betting can be done with thousands of individual stocks, stock indices, interest rates, currencies, commodities, and other financial instruments. Tip: Most spread betting companies require spread bettors to use the full available margin.
Spread Betting Limitations Spread betting also carries several significant limitations that participants must consider. The most significant of these limitations is that the bettor never actually owns the underlying asset. While an investor who buys shares with cash and sees the price decline can choose to wait for a recovery in the price, the combination of holding costs and margin requirements can force a spread bettor out of their position before any recovery can take place.
Fees There are also numerous fees that apply to spread betting. First, participants must pay the entry spread, buying at the ask price and selling at the bid price.
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The FTSE , for example, only holds the or so largest companies listed on the London Stock Exchange, with market cap being used as a proxy for size. So if a share price collapses, as was the case with Northern Rock, then the market cap declines and the share needs to be replaced with a larger one.
As many fund managers track the FTSE they will need to buy the new shares entering that index. Yep … the shares that are no longer part of the index. Summarising all that into one sentence: a stock exiting the FTSE is going to drop in price and a stock entering it is going to rise.
In the short term at least. Changes to the Dow, in particular, are few and far between… Imagine having a short position on the Dow Jones, which is constituted of 30 of the largest companies trading in the USA, and 12 of them pay their dividend on a particular day. The Dow might have fallen on this day and you might have mistakenly thought that you would be ahead, but instead the dividends wiped out your profit. So if you want to skip on to Lesson 4 be my guest.
So take a few minutes to remind yourself with the relevant bits of the What Is A Dividend post. Well an index is just a basket of stocks. The size of the payment is determined by the weighting of the stock in the index. Both are pretty small though. Also although there will be a cash adjustment in your account, in reality it makes no difference to your wealth.
This is because, just like a share price falls when it pays a dividend, so an index price also falls when the stocks it contains goes ex-div. So what you end up with on an ex-div date is: If you are long you receive a dividend — but you lose a bit as the price of the index falls. If you are short you paid a dividend — but you gain a bit as the price of the index falls. As I said at the beginning, the end result is little or no difference to your wealth.
A useful tool to understand a bit more about what is moving a market is a heat map. It shows which sectors that are having the most impact on an index price. Digital Look have a free one, although you have to register. Also take note: it shows movement across all stocks, not just those in a particular index.
Having said that with indices there is less need for scrupulous analysis of individual companies balance sheets and cash flows and as such technical analysis is even more important here. Since indices are a basket of stocks, their very nature means that big rises in particular constituents tend to be offset by market laggards. This makes indices less predictable in turbulent markets. These rallies can be partly attributed to an improving economic picture but mostly the support is coming from central banks.
What affects Indices? Indices are affected predominately by the performance of the stocks listed on them, so in a sense, the internal and external factors that affect share prices will affect the wider markets. If, for example, the technology industry is booming while the financial sector is struggling, then indices that are more heavily weighted in technology stocks may perform better. Types of Bets — Daily and Futures You can take a short-term Daily Bet, to take an immediate position across a whole market.
Or you can take a longer term futures bet, to gain exposure to market moves over several months. If you are doing a trade just for a few hours or days, then a Daily or Rolling Daily may offer you the best spread. Spread betting can be a better option than stock trading in the futures themselves, because it usually involves a smaller minimum bet size, and spread betting companies often quote the leading indices even when the underlying markets are closed.
Below are some tips that will help you get off to a good start. Keep a close eye on the latest financial news and economic developments, as these can often affect how the market moves. There are key psychological levels in every market, and if these are broken through, it can result in significant activity or volatility. For example the Dow Jones 10, level has proven to be an important psychological indicator.
Markets tend to move in unison, so what happens on the larger markets such as the Dow and FTSE can have an influence on other markets around the world.
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