You may not have heard of the Russell 2000 as is somewhat overshadowed by its big brothers in the USA, the Dow Jones Industrial Average, the NASDAQ, and the S&P. But the Russell 2000 covers a completely different market sector, dealing with small cap companies. If IG Index is your spread betting company, you can find the “US Russell 2000” under the “Other” tab of US indices.
One of the sayings of the trading market is that “small caps lead the way out of a recession”, meaning that a recovery from recession usually starts with small cap companies doing well before the larger behemoths get underway. So the Russell 2000 index promises to react differently to the major indices.
The Russell 2000 index is similar to the FTSE 250, in that it’s the companies left after taking away the biggest ones. The FTSE 250 is 250 companies after the first 100, which are in the FTSE 100 – together the two indices make up the FTSE 350. The Russell 2000 is comprised of the 2000 companies after the first 1000, that is the 2000 smallest companies in the Russell 3000 index, which itself represents 3000 biggest US stocks.
Even though these are small-cap companies, the average market capitalization is about US$1 billion. The largest company in the Russell 2000 has a capitalization of about US$5 billion. The Russell 2000 index is often used to provide a standard for small cap mutual funds to measure their performance.
As a measure of how small the companies are in relationship to the overall share market, these 2000 companies represent no more than 8% of the total capitalization of the Russell 3000 – in other words, 92% of the market is in the first 1000 companies.
Because these represent the companies after the first 1000, it is not likely that you recognize many of them as household names. However, Sotheby’s American operation is listed here.
Small-cap companies are by their nature volatile, with some expanding to become mid or even large cap, and many others falling by the wayside. The Russell 2000 Index is completely reconstituted every year to make sure that larger stocks are promoted out of it and do not distort the figures. The volatility means that it is an exciting index to trade, and that you need to have a workable plan in place to minimize your losses if the ride becomes too choppy.
With all the foregoing, you may feel that the Russell 2000 index is a little unknown, and feel concerned at the prospect of spread betting on it. This should not prevent you considering it and following its movements for a while to see if it suits your style of trading. You must realize that even small-cap companies that are publicly traded are much larger than you may be thinking of. They have all been through the Initial Public Offering (IPO) stage, and for the most part have developed products and services that the public requires. The Russell 2000 is a good alternative US index to consider for spread trading.
Russell 2000 Spread Betting
On the principle that small-cap markets lead an economy out of a recession, you decide that the Russell 2000 Index is going to go up, and place a spread bet of £8 per point at a buy price of 695.55, noting that the current sell price is just one point away at 694.55.
You have correctly anticipated the movement of the index, and watch with excitement as it goes up to 743.26 – 744.26. Unable to contain yourself any longer, you close your bet and count up your profits. Your bet closes at 743.26.
You can work out how much you won like this. The number of points that you gained is 743.26 less 695.55, which is 47.71 points. As you bet £8 per point, you multiply this out and find you have won £381.68.
Nobody can predict the market all the time, and you may find that you are on the losing end of your spread bet. If this is the case, you should be prepared to close the bet quickly and minimise your losses. Say you watch the index fall to a level of 684.42 – 685.42, which is your stop loss level, so you close the bet. As it was a “long” bet, you must close at the “selling” price of 684.42.
You can work out how much you lost by using simple arithmetic.
The number of points that you lost is 695.55-684.42.
That amounts to 11.13 points.
At your bet level of £8, this means you lose £89.04 this time.
Some people prefer to spread bet on futures based indices, and this has the advantage that you are not charged daily interest, which although small would mount up if you held onto the bet for several weeks. The current quote for two months out with your spread betting provider is 686.45 – 687.45, and you place a £4 per point bet on the index going up, at 687.45.
If all goes well, and the index goes up then you make a profit. Say that the index is at 732.61 – 733.61 when you decide to close your bet and collect your winnings. Here’s how much you have won: –
The number of points you gained is 732.61-687.45, which is 45.16.
Your total winnings are given by multiplying this by the stake of £4 per point.
Therefore the total you have won is £180.64.
It is always wise to remember that the index can easily go against you, and you need an effective trading plan in place so that you close the spread bet quickly before you lose too much. Too many people hang on hoping that it will turn around, only to find that they lose even more. Say in this case that the index fell, and you decided to cut your losses by closing the bet at 671.32 – 672.32.
What was the total that you lost? You work it out in the same way by multiplying together the points difference and the stake per point. The points you lost were 687.45-671.32, that is 16.13 points. For this current wager, that means you lost £64.52.