Going against the crowd can be a profitable, if dangerous, path to take when spread betting on shares. Scott Longley explains how to chart a safe course
By Scott Longley
So why are we talking about shares again?
Well, punting on the FTSE and other indices aside, betting on shares happens to be the main activity of most financial spread bettors.
But what about currencies and betting on the price of oil?
You’re right, of course. However, unless you’re something of a market whiz in either of these areas, such markets are best avoided.
Is this another case of those in the know attempting to keep everyone else out of a profitable market?
No, not at all. It’s about trying to avoid seeing novice spread bettors get involved in markets where they’ll prove their lack of in-depth knowledge via severe losses in the wallet department. We’ve said before that spread betting on financial markets is a tricky business, and volatile markets such as the value of the dollar and the pound, or the price of a barrel of the black stuff, are among the most seesaw the financial world has to offer.
So how do I go about avoiding being the next Norman Lamont?
Well, other than avoiding singing Je Ne Regrette Rein in the bath and steering clear of the pies, the best idea is to stick to small stakes where there’s half a chance of coming away with your shirt still in place on your back.
So it’s back to shares, then
In case you haven’t noticed, the equity markets are booming, and one of the best ways to profit from financial spread betting is ‘momentum trading’. Positive reports regarding a company or a piece of good news on the economic front can often be the signal for a spot of bullish behaviour, as is the case at the moment. However, the markets can switch violently at times. The trick is to understand what lies behind the momentum trading – and know when it’s best to duck out.
So all I have to do is follow the herd and I will make a whopping profit?
Er, not quite. In fact, one of the classic ways of making money via trading and spread betting is to do just the opposite and be a contrarian.
You want me to be a what?
A contrarian. It means going against the crowd. There are many opportunities to find unloved shares and punting on the market changing its view on them. A classic of this sort would be spotting potential takeover targets. Or you could bet on a company that has recently had a bad run and has issued a profits warning. Such an event will always hit the share price, but most companies that run into this will make some management changes, or market conditions will move back in their favour. When this happens, the share price will normally leap like the proverbial salmon.
Sounds simple enough
You would think so, wouldn’t you? However, beware an old stock-market saying: never try to catch a falling knife. Picking exactly when a company has turned the corner is a tricky business.
Thanks for the encouragement…
Just be careful. The financial markets can be an exciting and profitable hunting ground for the risk-hungry trading types for whom sports betting and online poker are merely distractions. They can also skin you quicker than a poacher can a rabbit.