Financial Spread Betting Help

One of the great advantages of Financial Spread Betting over investing in equities directly is the ability to place bets that effectively both 'buy' and 'sell' stocks, without ever having to actually own any. So now instead of only looking for stocks that we believe will rise in price, we can make just as much money on stocks that we believe are going to fall in price. Just think, twice the opportunity!

So, in an environment where we can make money on stocks going up or down, we soon realise that the only thing we can't make profit on is stocks that stay the same. So fundamental to our strategy is clearly to find stock that will change in value, and our prized stock are the 'movers', those that change value rapidly.

Whilst it may be true that stocks and share prices can 'drift' with market sentiment over time, the biggest movements arise from information about the company somehow finding its way into the market. That could come in the form of a news story, or perhaps a press release. Whilst you should always be alive to the possibilities that these situations present, it's difficult to plan for them in advance, as they are rarely scheduled events.

However, there is at least one event each year for every company where financial information does come on to the market, and that is when they release details about their financial results. Indeed for the quoted companies in the FTSE 100 and FTSE 250 this is usually twice yearly or even quarterly. Given that there are 350 companies in those indices combined, that is 700 statements a year or almost 3 each trading day. Generally speaking they will be released at 7am, before markets open.

Now, the companies do speak to analysts throughout the year, and if the results are in accordance with city expectations then the impact of the results may already be factored into the share price. On many occasions, however, it is not, particularly in turbulent economic times.

And the beauty of results announcements are that you can find out exactly when they are going to be, as they are pre-scheduled by the company involved and listed in most of the financial press the week in advance. So by being aware, you get the chance to watch how the market reacts to the statements as the markets open. You need to take care with this kind of spread bet in the same way as you would take caution with any bet. Watch some first before you jump in and invest. See how the market reacts, and work the trends. Don't forget, it doesn't matter what you think of the results, it's how the market reacts to them that you need to respond to.

Financial Spread Betting - Stop Losses

The main tool used by successful traders is the 'stop-loss'. This is simply using the platform provided by the spread betting provider (compare here) to implement an 'if, then' order. But how might this work in practice?

Let us take an individual with a bank of £3,000 who believes that the share price in Company X will rise above its current value of 100. It is currently being quoted at 99-101, and he wants to bet £10 per point, so he places a buy order at 101. Now, hopefully our clever investor has called this correctly, and he goes on to take his profit as the share price rises. But what if it goes the other way? There are two problems here. Firstly, he may not be able to watch the market 100% of the time. The share price could fall in his absence, and he could come back to it to see a large loss. The second issue is knowing exactly when to sell on a downward trend. In the cold light of day he may have a clear strategy that he doesn't want to lose more than - say - 3% of his bank on any one trade, but in the heat of a moving share price, logic may not always apply.

The answer is to incorporate a stop-loss policy for each and every trade into your trading strategy; one that matches your own risk appetite. So in this instance, our trader doesn't want to lose more that 3% on any one trade. So 3% of his £3,000 bank is £90, or 9 points at £10 per point. Clearly, then he needs to set a 'stop-loss' sell out at 92p (101 purchase less 9). Once that mechanism is in place, if the sell price moves down to 92p a trigger closes the trade, and the loss is controlled within our trader's risk appetite.

Be aware, though, that ordinary 'stop-loss' tools only trigger the sell out once the pre-determined price is reached. What does this mean? Well, in a rapidly moving market it is possible that between the time the price to sell is triggered and the actual sale is executed, the market may have fallen even further. This is called market slippage. Indeed, should the share be suspended, there is still a possibility of a zero price sale, even with a 'stop-loss' in place. It is possible to buy a 'guaranteed stop-loss' from some providers, where the spread betting firm itself guarantees a sale price and takes the risk of market slippage on itself. Of course, in return for this the price - or margin - on the stop loss is greater, so you need to evaluate this possibility yourself based on your own risk appetite.