Indices offer market watchers an aggregated view of equity price movements. But why just watch them, when you can trade them too? This article explains how to spread bet on indices, explaining the key strategies involved in profiting from their price movements. We’ll also outline the primary benefits and risks involved in this approach.
Indices refer to a weighted collection of equities selected to highlight the performance of a particular market sector or geography. With popular examples including the FTSE 100, the Dow Jones, and the NASDAQ, indices provide top-down oversight of prevailing market conditions. But while many financial market participants use indices as a key performance metric, they can also be traded.
How to spread bet on indices
At this point, you might be thinking: ‘how is it possible to trade indices?’ With each index comprising tens, and often hundreds, of individual stocks, you’d be forgiven for deeming such investments prohibitively complex, not to mention expensive. The simple answer is that index traders don’t actually own any of the underlying holdings. Rather, through the use of derivative strategies like spread betting, it’s possible to take a position on an index’s movement as a whole.
By eliminating the need to own the constituent stocks of an index, spread betting allows traders to easily take a position on larger economic trends. For those looking for wider market exposure, such strategies can prove an effective solution. But as with all trading styles, it’s essential to understand the risks involved.
Spread betting indices can provide a host of benefits for traders seeking to profit from broader economic movements. To a greater extent than trading individual stocks, commodities, or currencies, indices provide a ‘big-picture’ approach to financial market speculation. As such, this style of trading suits those who are well acquainted with the macroeconomic factors that impact price movements.
Other features of spread betting indices include:
To help magnify potential returns, traders can use leverage to their advantage. Leverage is like a loan offered by a broker to help traders increase their trading power for a specified amount of margin. However, it’s important to note that profit and loss is calculated using the full size of a position, not just the margin. This means traders could end up losing more than their initial deposit, which is why a careful risk management strategy is essential.
The leveraged trading industry is regulated by the FCA, one of its roles is to ensure consumers are protected. Click here to learn more.
Trade both ways
Unlike individual stock trading, spread betting allows traders to choose a ‘buy’ or ‘sell’ position, based on which way they think the market is headed. Otherwise known as going ‘long’ or ‘short’, this provides extra opportunities for those anticipating a bearish trend. It also allows traders to capitalise on a notably volatile index market.
In many tax jurisdictions, returns made through spread betting are treated differently to those gained from stock trading. As such, profits are typically exempt from capital gains tax, meaning you can keep all the profits you make. Additionally, such returns are free from stamp duty, as traders never own the underlying asset.
One of the most important things to bear in mind is that losses may end up exceeding your initial investment. While brokers will typically trigger a margin call to prevent you getting into debt, the prospect of losing all your money on a single trade can be damaging in itself. For these reasons, it’s essential to maintain a carefully balanced risk-managed strategy, including stop and limit orders where appropriate.
Depending on the platform, traders also have to pay fees and margin rates for their trades, which are subtracted from profits or added on top of losses. By remaining aware of these extra charges, you can obtain a clearer picture of the actual outcome, despite what your profit/loss.
To begin spread betting on indices, traders will firstly need to find a suitable broker. Not all trading platforms offer spread betting as an investment style, so it’s important to recognise the limitations of each provider.
For instance, derivatives are commonly provided in the form of CFDs (contracts for difference), which – while similar in many respects – offer a slightly different proposition. For a start, the tax benefits discussed earlier are typically absent from CFDs. Additionally, commissions and transaction fees are normally charged, as opposed to spread betting, where fees are expressed as the difference between the bid and ask price. It’s therefore best to keep in mind that just as not all derivatives are the same, the scale of opportunities provided by brokers will differ too.
Spread betting can be daunting at first, so it’s important to choose a broker that offers a fair and competitive service, with products and services that you can understand. So whether you’re trading your favourite stocks like Apple and Google, or indices such as the Germany 40 index derivative price, it’s important to shop around to make sure that you’re getting the best deal.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.