How to use spread betting to diversify your portfolio

By John Harrington, a highly experienced financial journalist who regularly presents Digital Look's How to Trade from the News seminar.
This article is taken from the Investor's Guide to Spread Betting. Download your free copy here.

I don’t know if people still keep eggs in baskets, but the old adage still applies. Unless you are prepared to keep a very close eye on your basket and are utterly sure of the workmanship of said basket, it is generally a good idea to spread your risks.

This means more than putting your money into three Icelandic banks rather than just the one!

It means thinking about your core portfolio and the threats to it, and either hedging against those threats, or reducing your dependence on a particular part of it. Here are my tips for how to diversify:

Become a commodities trader

Spread betting opens a number of doors to us private investors. Looking at a specific example, British Airways is often susceptible to the price of oil. Filling your garage with barrels of oil isn’t going to do much to hedge your position here, but spread betting the price of Brent Crude might.

Go abroad

People keep telling me the world is getting smaller and we’re all internationalising. Shame no-one told my broker. Buying foreign stocks can be an expensive exercise in form-filling but if I want to diversify my portfolio by investing in international markets, spread betting might be the answer. I get instant and cheap access to thousands of foreign stocks giving me opportunities from American Express to Zhaojin Mining…Sector selector

Sometimes you have an investment idea based on your perception of social or fiscal trends but you are not sure which company is going to benefit from it. For instance, you might think that military spending by governments is going to continue to rise and defence stocks are traditionally solid performers in a recession.

So which stock should you buy? BAE Systems? QinetiQ? Smiths Industries?

You can do lots of research to find out which one is most likely to benefit from increased military spending but do you really feel qualified to gauge whether one company’s military communications technology is better than another’s?

Save yourself the effort and just buy the whole UK defence sector, and if there are one or two companies in that sector you don’t much like the look of, take the down bet on those stocks.

Russia crusher

There’s nothing to stop you taking a view on a whole country’s stock market, either. Not so long ago, Russia was flying high on the strength of soaring oil prices and a huge population that was in a hurry to catch up with the West. But then, Russian stock market indices started falling faster than the temperature on a winter night in Moscow.

You can participate in the wild ride from the comfort of your office without ever having to learn a word of a foreign language. You can do so without having to worry about liquidity problems; can you say the same thing about those shares you bought in some dodgy potato vodka company in a weak moment last Christmas?

Summary

Spread betting offers a range of options to diversify and hedge long term positions. So here you have it. Four new baskets for all those eggs!

Spread Betting Articles:

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Please remember that Spread Betting is a leveraged product and carries a high level of risk to your capital. It is possible to incur losses that exceed your initial investment. This product may not be suitable for all investors, therefore ensure you fully understand the risks involved and seek independent advice if necessary. You and CMC Markets, and not Digital Look, will be the counterparties to each Transaction. CMC Markets (i) executes transactions with you solely as principal and (ii) deals on an execution only basis - therefore CMC Markets is not under any obligation to provide any advice on the merits of any transaction. CMC Spreadbet Plc is authorised and regulated by the Financial Services Authority. *Tax laws can change.

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