Stock market betting
The easiest way to make money on stock market movements is with financial spread betting. Another way would be to trade in what are called 'futures,' but that is far from easy - especially when dealing with overseas markets - and not for the average punter. If you are new to financial spread betting read our beginner's guide to learn the basics.
When people talk about betting on a stock market they mean betting on the movements of a stock market index. The London stock market for example includes the FTSE 100, FTSE 250 and many other indices. The FTSE 100 index is the aggregate of the share prices of the top 100 companies in the UK. The FTSE 250 is the index of the next 250 biggest companies. A stock market index gives an indicator of the overall 'health' of the stock market and of the wider economy. When the FTSE is doing well it's a good sign that the UK economy is in good shape. If bad economic numbers come out, such as worsening unemployment rates, then expect falls on the FTSE. Around half the bets placed with financial spread betting companies are on stock market indices and there are a number of reasons stock market betting is becoming more popular than betting on individual shares.
Why bet on stock markets?
Indices are more predictable than individual share prices.
Stock markets are an average of a number of companies, where the random movements of individual shares are smoothed out. The large number of trades means that one big seller or buyer has little or no impact on the index.
Stock markets tend to follow long and medium term trends which can be easily followed.
The most you are ever likely to see a stock market move in a day is around plus or minus 10 per cent. The prices of individual stocks on the other hand can have dramatic movements, sometimes doubling or even crashing to near zero.
Narrow spreads
The difference between the buying and selling prices - and hence the cost of the bet - can be much smaller with an index than on a share. The FTSE at the time of writing is being quoted at 4431-4433 - a spread of 2 points. Narrow spreads are an important benefit, as wider spreads will eat into your profits - especially if you are making a lot of trades.
Easier to get information
If you are following individual companies it can be harder to get hold of key data (for instance that a lucrative contract is about to be signed). This sort of information is often available to 'those in the know' and if you are not one of them you can get caught out. In contrast, stock markets are scarcely affected by these events. Their movements are primarily driven by economic data, which is generally in the public domain. In other words you as an average punter are not disadvantaged by those in the city, because you know just as much as they do.
You can hedge your investments
Let's say you own shares in Marks and Spencers an want to hold because you like the company but you're worried that the economy is about to turn sour, dragging M & S down with it. You could 'hedge' your investment (balancing out your investments so you are protected when your stocks go down) by betting on the FTSE 100 falling. If it turns out you are right and the FTSE sinks you would lose a bit on your M & S shares, but you would make up for this by cashing in on your stock market down bet. As long as your company does better than the FTSE then you are in profit. You could also be more specific and bet on the retail sector index. Each of the major world indices are divided into sectors such as retail, insurance, technology etc. and most spread betting companies will let you trade on these.
Stock market betting strategies
Studying the charts
Financial spread betting is more than just gambling on random events; it is making considered judgments about things which have a degree of predictability and on which you can make long term profits provided you act intelligently. Nowhere is this more true than when dealing with stock market indices. These follow patterns and trends that can be brought out by looking at graphs plotted over time. This approach is referred to as technical analysis. These patterns aren't always evident on first glance, but with a little study it is possible to learn how to pick them out and make predictions about the next movements. These methods aren't 100 per cent reliable but those who are good at it find they are right much more than they are wrong - and that is all you need to be a winner in the long term.
Following the news flow
Global and national events can have impacts on indices that are fairly predictable. When OPEC calls a meeting or makes an announcement it's a fair bet that it will have an impact on oil prices and this will affect the FTSE oil & gas sector for example. On October 11th 2006 a light aircraft crashed into a New York apartment building. Merely because of its superficial similarity to 9/11 it caused a half a percent drop on Wall Street stocks. Once people had a chance to think about it the price recovered. Panic over. These and many other events can offer trading opportunities to those who follow the news and can quickly think through the consequences.
Studying economic data
In the same way that a company's share price is tied in with the health of its balance sheet, a stock market index is inextricably linked to the country's economic well-being - and one will rise and fall with the other. As inflation worsens or unemployment rises then the stock market will surely fall. If you can gain an understanding of the state of the economy then you also have an insight into the stock market index and can begin to make predictions about forth- coming trends. Much of the available data will already be factored into the price, so you need to work just that little bit harder to keep one step ahead of the crowd.
Following interest rates
One of the biggest drivers of stock market prices is the level of interest rates. This is for two main reasons. Investors have basically two choices as to where to put their money: in a bank or on the stock market. If interest rates rise then the bank option becomes more attractive, causing them to move money out of the markets and precipitating a fall in the market. Also if interest rates are low then it makes companies' debts cheaper to service and also encourages them to borrow to invest, which is good for future profitability. Studying interest rate movements can help you predict which way the stock market is likely to turn.
Watching world stock markets
Stock markets all affect each other. The New York exchanges close at around 10pm UK time and a few hours later the Asian markets, principally the Hang Seng (Hong Kong) and the Nikkei (Japan) begin to open in the early hours of the morning. If there have been big falls on Wall Street it's odds on this will add downward pressure on the Asian markets. Just as these stock markets are closing the London exchanges are opening and will look to the Asian markets and to Wall street to set the tone for their day. Particularly in uncertain times everyone is looking to everyone else for clues as to what to do next. In this way market movements can move around the globe. Because many spread betting accounts offer 24 hour trading it is possible to keep an eye on Wall Street and make bets on the FTSE, depending on how you believe movements in the US will impact the UK. This is a useful strategy for people who prefer to deal in the evening and who have an interest in global economics.