Spread Betting the FTSE 100

FTSE 100 (UK 100)

The FTSE 100 (pronounced footsie) is a share index of the 100 top companies listed on the London Stock Exchange. Related stock exchanges are the FTSE 250 Index (which lists the next largest 250 companies), FTSE SmallCap, FTSE Fledgling, the FTSE 350 Index (which is the aggregation of the FTSE 100 and 250), and the FTSE All-Share Index (which aggregates the FTSE 100, FTSE 250 and FTSE SmallCap).

In England there is the FTSE 100, FTSE 250, and FTSE 350 – all of which are very popular spread betting markets. With most providers spread betting on the FTSE and Dow Jones are likely to be the most popular. The top 100 UK companies form the FTSE 100 Index, which is more commonly known as ‘the footsie’. In other words the FTSE 100 is a share index making up the 100 largest companies in the United Kingdom; and given the London is the financial hub of Europe, the FTSE 100 is Europe’s most important index. Each company is given a percentage weighting of the index.

Spread betting the FTSE is a great way to start trading, as most people with any interest in the financial markets have some idea of the way the value of the FTSE changes, even when they do not know much detail about the individual stocks and shares that make it up. Spread betting is all about anticipating the future direction of a price, and betting appropriately. Because it’s called betting, it’s free of capital gains tax in the UK, but the effect is just the same as if you are trading.

But seasoned traders too can make good money by spread betting the FTSE, and it allows you to take a top-down view of the market rather than having to wade through the details. Spread betting lets you make money whether the FTSE goes up or down, you just have to make your bet in the right direction.

Trading on equity indices gives you exposure to a basket of different shares in a single transaction. When we talk about the FTSE, we usually mean the FTSE 100 index which is based on the performance of the top 100 companies in the UK market, and that is what is shown in the examples. You may also hear about the FTSE 250 index, which is based on the next 250 companies after the top 100, and the FTSE 350 which is a combination of those two indices. As the largest companies can perform differently from smaller companies, it can make a difference which index you trade.

The FTSE 100, albeit important isn’t as significant as the Dow Jones. In fact the Dow is often considered the primary index which all other indices tend to follow and ‘react’ to.

The FTSE 100 is marketcap weighted and also free float adjusted, so the largest firms by value have the greatest impact upon the index. The higher a company’s market capitalisation, the greater impact it has on where the FTSE 100 index moves. Weightings for each company are reviewed on a regular basis and the announcements appear in the financial press. The index makes around 80% of the London Stock Exchange’s market capital and all companies in the FTSE 100 index have to include PLC in their name, as an indication that they are public limited companies. However, the FTSE 100 index is still not an accurate benchmark of the UK economy since it mainly includes banks, oil firms and mining companies; in this respect FTSE All-Share which includes over 600 firms is a better barometer of how the UK economy is faring. Trading hours for the FTSE 100 are from 08:00 to 16:30 GMT.

The FTSE 100 index consists of 100 companies, but a total of 102 listings as two classes of shares are included for Royal Dutch Shell and Schroders.

Betting on the FTSE

The FTSE 100 market is the most traded index on the LSE. It is also known to be the least volatile, which is probably why so many beginner traders tend to speculate on the index with their first forays into share dealing or financial spread betting.

Spread betting the FTSE 100 is not difficult to understand. Let’s go over an example of a spreadbet on the FTSE 100:

Suppose it is 8:30 in the morning and the FTSE 100 is trading at 5560-5561. You think the FTSE 100 index is going to rise and decide to buy at £5 a point at 5561. Over the next two hours, the FTSE rises and you decide to close your spread bet when the quote is at 5585-5586. You sell at 5585 so the market has moved 24 points in your favour. Since you’ve bought at £5 a point, you’ve made a £120 (5 x 24) profit. Of course if the market had fallen, you’d be losing money.

Daily FTSE Trade Example

Through your spread betting account you can take a trade on the FTSE 100 – commonly represented as the UK 100 within the trading platform. In the circumstance that you expect the FTSE 100 to fall in value – you can take a short position and sell the UK 100. Alternatively, if you are of the opinion that the FTSE 100 will rise – you can go long and buy the UK 100.

For instance, the Daily Funded Trade represents the FTSE 100 index market. By taking a trade on the UK 100, you can take a position on the future price movement of the FTSE 100. If you thought that the FTSE 100 was going to go up, you would choose to “buy”. If the quote was 5750 — 5751, that means you could buy at 5751. The other figure is for selling, and the difference between them is the “spread”, which is how the spread betting firm makes money. You choose exactly how much you want to risk, with the understanding that the index could go down instead of up, and you would then lose money.

Say you bet £1 per point, buying at 5751. The market rises as you expect, and you decide to close your position later that afternoon when the quote from your broker for the FTSE 100 stands at 5770 — 5771. You close your position by selling, which is at the lower price of 5770, and that means a gain of 19 points (5770-5751). At £1 per point you have a profit of £19. Similarly, at £10 per point you have a profit of £190.

Suppose instead that the market falls, and you have to rush to close your position before you lose too much. If the quote was 5742 — 5743 when you liquidated your bet, you would sell at 5742 losing 9 points. That means you would lose £9 if you were betting at £1 per point. Similarly, at £10 per point you have a loss of £90.

You can just as easily go short, or sell the position if you think the index will drop. Suppose in that last example you anticipated the drop, you would open your bet by selling at 5750 and close by buying at 5731. That would give you 19 points gained, for a profit of £19.

What Moves the FTSE?: What makes the FTSE Index Move?

The major index markets represent the top stocks in their respective economies (FTSE 100 – United Kingdom, Dow Jones 30 – US), and all are very well known. When I started trading I focused on the FTSE and then moved my attention to the Dow. The reason that I started with the FTSE is because it is about as stable as an index can ever be. I could have chosen the DAX (German) or the CAC (French) but they pretty much all mirror what the FTSE is doing and vice versa.

First of all keep in mind that mining and oil companies and banks constitute between them 47% of the FTSE 100’s market capitalisation. The companies making up the FTSE 100 are some of the largest companies in the United Kingdom so both domestic and international news activity is likely to have a bearing on their price movements. By and large the major indices follow a recurrent pattern – the stock exchange in Tokyo opens first, followed by London and lastly New York; with each market reacting to changing data in a similar way and with market participants trying to predict what direction an index will go based on what happened in the other major markets. With respect to the FTSE 100, the previous day’s performance of the USA market is also important as this will set the pace for the first hour of trading.

Company Earnings

Stock market speculators and spread bettors follow the earnings of companies making up the FTSE index which are usually released on a quarterly basis. Analysts will regularly make up a consensus forecast on such earnings and should the actual number be better than the analyts’ expectations, then the price will rise and if it turns out to be worse, then the price should fall. Naturally the earnings of companies making up a bigger chunk of the FTSE index (say the top 10 by market capitalisation including HSBC, Vodafone, BP and Royal Dutch Shell) will have an even greater impact on the movement of the FTSE 100 index and should be monitored more closely. The main FTSE sector constituents are financials making about 20%, next oil and gas at 17.7% and basic materials at 14%. In particular, Oil and Gas Producers are dominated by just 4 stocks in the index: Royal Dutch Shell (RDSB), Tullow Oil (TLW), BG (BG.) and BP (BP.).

News

All day FTSE stock market traders are glued to their news screen on the lookout for news that might impact the economy and the markets. News that might move the FTSE index can range from company specific events to news from the other side of the Atlantic. Here it is important to have access to live-feeds as the financial markets are very efficient and most news will already be discounted in the price by the time the masses read the story on newspapers. Daily high-low fluctuations of around 60 points are common for the FTSE although movements of 100 points or more are not unheard of during volatile periods.

Interest Rates

FTSE day traders will keep a watchful eye for any prospective change in interest rates as this will also have a consequent impact on stock market valuations. Generally, lower interest rates represents good news for the FTSE index as this means that the companies constituting the index will not only have to pay lower interest rates on debt (thus rendering them potentially even more profitable) but also the returns the FTSE could offer look more attractive in investors’ eyes in respect to the lower interest rates one could get from bonds.

In addition large companies are normally less volatile than smaller ones which in turn makes the index less volatile. With the FTSE being relatively stable, that means price fluctuations are not very wild by and large (there is always the exception) and therefore neither are your chances to make large gains in a single trade (but of course this also means that this reduces the possibility of sudden, sharp index movements catching you by surprise). The other downside to trading the European Indices is that beyond a certain time of the day, they stop being independent and start to wait for the USA markets to open. They then follow what the USA markets do until their close. So in effect you basically have three hours of normal trading, which are then followed by two to three hours of the markets waiting and then two hours of mirroring what’s happening in the United States – albeit on a smaller scale.

Commodities like gold and copper are likely to impact the FTSE’s direction not least because of the large weightings of mining stocks, and likewise will the financials like Barclays and HSBC. This makes the FTSE less of an ideal benchmark of how the UK economy is faring given its relatively narrow breadth and heavy dependence upon banks, oil companies and miners.

Constituent companies move the FTSE 100 but if this is the case why do numbers like 6000 become resistance/support targets with FTSE traders? And why do they trade these key numbers are they thinking people who hold a FTSE 100 company may decide to sell when the index itself reaches a key number?

Answer: No not just random markets. Round numbers, pivots, support and resistance all are real psychological areas where traders take profits and open new positions. Madness of Crowds. Pit traders know it, day traders know it and the institutional program traders know it. If enough people believe in it then it’s likely to happen. That’s why we sometimes get double tops and double bottoms. You can believe they are random or you can believe they are traders fear and greed.

FTSE 100 Spread Betting Strategies

The UK 100 Index is commonly known as the FTSE 100 index or sometimes simply “footsie”. It is the primary index for showing the state of Great Britain’s economy. It was launched in 1984 with a base value of 1000, and it’s been up to nearly 7000 but is now around 5500. It is a market capitalization index, which means that it includes the largest 100 companies on the London Stock Exchange. This actually covers more than 80% of the value of all the companies on the LSE. Globally, the FTSE 100 accounts for over 8% of the world’s equity markets.

There is a further part of the equation which specifies that it is a “free float” index. All this really means is that the shares used for calculating capitalization are available on the open market. They adjust to the constituents of the index every quarter. Companies from the FTSE 250, which covers the next 250 largest companies, can be promoted into the 100 if they have a capitalization greater than the top 90 in the FTSE. This restriction ensures that there is less promotion and demotion than otherwise, which might foster uncertainty.

The 10 largest companies in the FTSE 100 include three oil and gas companies and two mining companies. The ten oil and gas companies in the entire FTSE 100 comprise about 20% of the total value, and are the largest market sector.

Because the FTSE is so well known and so heavily traded, you are sure to find that any spread betting company lists several available bets – a rolling daily one and several different future-based bets. There is also no shortage of advice to be found on the Internet on how to trade the UK 100. The best advice is to read this but make up your own mind.

It is common with market indices that they fluctuate a lot, and the UK 100 is no exception. This is perhaps why it is one of the favourites among spread betters. Another reason would include the familiarity that many traders feel to the product. But anyone who says that the stock market is a great place for long-term cash as it will always beat any other investment should face up to the fact that they are talking averaging out over a very long-term. The actual figures suggest that the market returns are not so great.

Over the last 10 years the total return from the FTSE 100 index averages out to 4.1%. Along with small-cap shares, the index has been disappointing for a buy and hold investor. On the other hand, the volatility has been consistently around 15% for many years, which is great news for someone who is interested in trading and therefore in prices changing with large swings.

As always, the caveat when spread betting is that you must take care to protect your capital, accept that some bets will lose and close them quickly, and enjoy the profit that you can make from the volatility.

A Down Bet on the FTSE 100

Let’s now assume that the FTSE 100 is presently trading around the 5600 level. You are worried that the ongoing market turbulence is going to negatively impact your blue chip UK shareholdings so you decide to hedge your exposure by shorting the UK 100 with a spreadbet. The spread betting provider is quoting 5600/5601. You sell at £10 per point meaning you will profit £10 for every point the index moves down. You place a stop loss order at 5620 as you would like to cap your losses to £200 (£10 x 20pts) should your prediction prove wrong. You are aiming for a gain of £600 so you place a limit order to buy the FTSE at 5540 (i.e. 60 point move translating into a £600 profit)