subject: Trading Global Stock Markets And Risk Management [print this page] Up until 2007 global stock markets experienced some of the longest bull runs in history. However, over the last few years, the stock markets have been incredibly volatile. We are now half way through 2010 and the volatility continues.
Everyone should accept that if they are going to trade there are ever present risks, irrespective of the investment format. Whether you use spread bets, Exchange Traded Funds or simply trade shares, it is likely that you will lose money on some of your trades.
But what options are there for those wanting a fast, flexible method of investment which also offers a wide variety of markets and the all important risk management tools?
For many UK, European and Australian investors spread betting offers a realistic solution.
As we have discussed, there are inherent risks with investing. There are downsides to all forms of investing and with spread trading you need to be careful because you can lose more than your initial investment.
There are some other areas that the following warning says you should consider, spread betting does carry a high level of risk. Before trading, please ensure that spread betting matches your investment objectives. Make sure you familiarise yourself with the risks involved. If necessary, seek independent advice.
At the same time though, you are able to put limits on your bets to reduce your losses but not your profits. You can also trade with small stakes such as 1 per point or $1 per point.
To gain a little exposure you could simply trade European, UK or US Stock Market Indices, ie speculate on whether the FTSE 100, Dax 30, CAC 40, Dow Jones etc will go up or down.
If you speculate on the FTSE 100 to go up, with a 1 per point stake, and it goes up by 150 points then you would make 150 points x 1 per point = 150.
Note that you can trade the markets in Dollars, Sterling or Euros. If you want to trade in Euros then 150 points x 1 per point = 150.
Of course if the market went against you, dropping by say 120 points, then with a 1 stake you would lose 120 points x 1 per point = 120.
That would not be the best of starts. However, with firms like City Index you can add a Guaranteed Stop Loss at let's say, 40 points.
If you were betting on the FTSE 100 it would simply mean that your bet would be closed if the FTSE 100 moved against you by 40 points. Therefore, instead of losing 120, you'd only lose 40 points x 1 per point = 40.
Of course, if you had correctly predicted the market direction then your upside would still be 150 if it moved 150 points or 75 if the FTSE 100 moved 75 points.
Spread betting does have many other advantages though, not simply the risk management tools.
Due to the broad variety of markets that are available, spread trading is an option that investors should consider. Spread betting companies usually provide investors with thousands of markets on which they can trade including shares, stock market indices, commodities and even minor currency exchange rates.
You can go long or short of the markets. As a result, you can speculate on a particular market to move in the direction that you think it is going to move. You are not limited to spread betting on a product to rise, you can speculate on it to fall.
You are not buying or selling any assets or rights; instead you merely spread bet on the future price of a market. This means that there is no income tax or capital gains tax on spread bets*.
Unlike trading stocks and shares, you are not charged brokers fees or commission based charges.
Ensure that you fully understand the risks before you trade. Using smaller stake sizes and applying a Stop Loss can help lower your risk.
* According to current UK tax law. If you pay tax in another jurisdiction then tax law may vary.
by: Thomas Bainbridge
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