- Date 31st August 2004
- FTSE 100 index 4,500
- September FTSE spread bet 4477-4483
Sam Smith has £5,000 to invest in the stockmarket so to work out how much of the spread bet to buy simply divide 5000 into the offer price of 4483 giving £1.11 a point to go long.
- To double check that this is the right amount assume that the FTSE falls by 10%
- A 10% loss on £5,000 would be £500
- A 10% loss on the index priced at 4483 would be 448.3 points x £1.11 = £497.61
- Don't worry about trading in an unusual amount, in this case £1.11, strange amounts are bet everyday with the brokers
Costs & The Rollover
In the old days spread betting was very simple, if you wanted to buy or sell the FTSE 100 index there was just the one month to trade. But now there are all sorts of different vehicles from the daily market, weekly market, monthly and quarterly etc.
Because these positions are being held for a long time then it makes sense just to use the quarterly bets which are March, June, September and December. This also means that you'll only be rolling over the trade 4 times a year.
For example the quarterly spread bets usually expire on the 3rd Friday of the month. So on or just before Friday 17th September Sam would rollover the bet into the December spread bet. The easiest and cheapest way to do this would be to call the broker up and simply ask him to roll a £1.11 long bet in the September into the December. The broker would then sell £1.11 of Sep and simultaneously buy £1.11 of the December. If the broker does the rollover he'll charge only a few points (Finspreads who we use charge 2 points), but if you do it yourself it will cost around 6 points because you'll have to sell on the bid and buy on the offer etc.
Running The Fund Is Simple & Cheap
Another advantage of using Spread Bets is the leverage factor in that you only need to put up a percentage of the nominal value to control the asset. If you wanted to buy £1000 worth of Vodafone stock through your regular stockbroker £1000 would be debited from your account. But if you wanted to replicate the trade using spread bets then only a fraction of the money has to be deposited, normally between 5%-10%.
The deposit margin on the FTSE 100 is at present 150 points so as Sam bought £1.11 a point his initial deposit would need to be just £166.50. The bulk therefore of the £5,000 can be safely tucked away in a deposit account. Of course variation margin will also have to be paid should the index move lower so it would be good advice for Sam to have at least £500 to £100 in the account alongside making sure that money can quickly be paid to the spread betting firm should they raise the initial margin or need more variation margin etc.
Adding to the Fund Every Month
Sam also wants to add £150 to his tracker fund every month. Remember tracker funds are not meant to think so it would be a wise move to carry out the same procedure every month regardless of what the market is doing. For example I would suggest that he always adds to his position at 9am on the first business day of the month.
Assume that the day is now Friday 1st October. The December FTSE spread bet is quoted at 4510-4516 and £150 needs to be added to the overall fund. Dividing one into the other you get £0.03 (rounded down) to buy. 3p a point seems a very small trade to make but it actually carries exactly the same financial P&L characteristics as investing £150 in the actual market.
Assuming that the FTSE doesn't move too much Sam's tracker fund will have around £6,800 invested within a year which will equate to £1.47 a point. And the only real work that needs to be done is to rollover the bet 4 times a year as well as add to the bet a small amount on the first business day of every month.
The Advantages
Tax-free profits must be the main advantage of this type of trading. But then one can argue that potential losses cannot be offset either. This type of investing though should only be done when you're confident that the market will rise over time and one should also note that this is investing not trading, ie looking to profit from quick short term moves.
Another advantage is the cost of running the fund is very negligible (the cost of rolling over the trade 4 times a year) as well as the leverage factor. This means the majority of your funds can be held on deposit making even more sense if you use some of the fantastic internet offers available today from the likes of ING Direct etc. (For a list of Online Banks Click Here)
Summary
Overall, we're surprised that nobody else is talking about using Spread Bets to replicate Tracker Funds. But we've long been stating that spread betting still has a slightly dirty reputation of just pure speculation. Speculation is where the spread betting firms want you to play because they make their money by clients trading in and out all the time.
Using Spread Bets for longer term strategies such as this makes a lot of sense and while you may not want to create a tracker fund yourself this exercise has been very worthwhile so as to give you ideas of how some of the different leveraged products can be used in ways not apparent at first.
LearnMoney Comment:
We have seen that because of the leverage of spread bets small stakes per point (of the FTSE 100) are actually equivalent to far larger cash sums. In the example above around £1.50 a point of FTSE equates to a £6,800 investment in a tracker fund.
This is why it's imperative to use a spread bet broker that accepts very small stakes, unless of course you're thinking of investing large sums. Although we don't invest in the market using tracker funds (or SB's to mimic a tracker fund) we would most likely use a broker like Finspreads for this kind of trading because they offer small stakes.
Whoever you trade with a wise move is to find out exactly what you can and can't do beforehand, and also realise that the spread betting firms are pretty flexible in what they offer even if it's not included in their standard literature.
