About Spread Betting

More FAQ links

Why should I use a stop/loss?

Two words – Northern Rock…do you really want to lose all your money?

Where do I put my stop losses?

There is no one clearly defined answer to that question – it depends on a number of factors, objectives, targets etc… each position is unique.

Do we offer trailing stop losses?

Unfortunately we do not.

Why does one profit warning often lead to another?

Profit warnings usually arise because a situation deteriorates without management being aware of it, or deteriorates faster than management expects. Either way, as soon as management becomes aware of the situation it is obliged to release an announcement about it as soon as practicably possible. This announcement therefore often goes out before management has obtained a thorough grasp of how bad the situation is, which often means a second profit warning is necessary a short while later.

Other times, the first profit warning may understate the case because management over-estimates its ability to turn the situation around.

Why does the share price of a company normally go down when it bids for another company?

A lot of takeover attempts are predicated on the basis that 2+2 can be made to equal 5 or more. The bidding company will almost certainly have to bid more than the current market valuation of the target company in order to succeed in its takeover, after which it will hope to squeeze costs, exploit synergies and benefit from economies of scale to justify the price tag of the company.

The market takes a pragmatic “seeing is believing” view of takeovers. The cost to the bidding company, whether it be through depletion of cash reserves, increased debt or the issue of shares, is actual and real, whereas the benefits the company seeks to achieve from its takeover are theoretical. Consequently, as a general rule, investors will be cautious about holding shares in a company that is bidding for another, especially as there are costs involved whether the bid succeeds or not (BHP spent $450m on its futile bid for Rio Tinto) and there is always the possibility of the company getting involved in an expensive bidding war.

Why does a news item relating to one company often impact the share price of a company in the same sector?

On the face of it, if Tesco has a good set of results, that should be bad news for Sainsbury or Morrison’s. In practice, the trading performance of companies is much more dependent on economic conditions than on how well they compete against their rivals, so a good set of results for one company is often a good omen for their sector peers. If you miss out on the rise (or fall) in the share price of a company after it issues a market moving trading statement, you can often still get involved in the action by trading the index (e.g. Food Retailers in the Tesco example).

What chance do I stand against professional traders?

Firstly, professional traders are not infallible. They usually have a matter of seconds to make a trading decision when an announcement is made, and this decision will often be made on the “headline” figure. A thorough analysis of a news announcement, combined with good background knowledge of the company (use the Company Results diary to do your homework the night before), can often enable a spread better to spot when the market has got it wrong.

Secondly, spread betters can get an edge by looking at a news announcement and relating it to less obvious trading opportunities: e.g. the collapse of Woolworth’s was good for HMV; the weakness of sterling is good for exporters but bad for companies with dollar-denominated debt).

Do I get any perks, as with traditional share trading?

You don't pick up the perks of actually owning the shares; you are not entitled to vote or attend company meetings. However, with online share trading, most investors will hold ‘nominee’ accounts which also don’t entitle them to any perks. For anyone who is already trading shares online, this limitation of spread betting goes largely unnoticed.

Can I offset my tax*?

Although spread bets are free of UK Capital Gains Tax* losses cannot be offset against capital gains you may have made from traditional share trading or other investment activities.

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