A spread bet with a financial spread betting provider on a stock market future is a bet about what the level of the underlying index will be on a specified date in the future, not a bet about the current level of the index.
Why is the future price of the FTSE different from the current price?
There are several reasons for this.
When you buy a share, now, today, you have tied up the money (say £5000) and cannot put that money into an interest-bearing account. There are two ramifications of this:
- You lose interest on the money (bad).
- You get dividends (if any) on the share you have bought (good).
When you elect to buy a future, it doesn’t really cost you anything, and so you could (theoretically) put the money into an interest-bearing account and make good interest. This has the effect of raising the price of the future. Conversely, when you buy a future, you don’t get dividends because you do not yet own the shares, so you lose out. This has the effect of lowering the price of the future.
Which is the bigger effect?
Interest rates are generally higher than dividend yields, and so the net effect is to raise the price of the future compared to the current price. In jargon, the future is said to be ‘trading at a premium’.
There are other, larger effects which can make the price of the future different from the current price of the index.
For example, the futures price can respond very quickly to good/bad news. This will only be reflected in the actual current index price when every last share has been bought or sold as a result of that news.
Finally, the price for a future is heavily influenced by the price of that future on the LIFFE exchange. Irrespective of today’s market conditions, if all the players think that the market is going to crash, the quote for that future will be low. Conversely, if all the players think the party will go on forever, that future will be high.