Using a spread bets to hedge your positions.

Tuesday, 30th April 2019 09:50 - by Rajan Dhall

Spread betting and trading CFD’s is often frowned upon in the investment community but they can offer some useful benefits.

The main difference between the two is the fact when buying shares you can only “go long” which means you can only bet the share price will rise. When spread betting or trading CFD’s, you can “short” a company's share price, allowing you to profit from weakness as the price moves lower.

Example: Say you believe RBS’s share price will fall and they are currently trading at 300p. You can short the company's shares at the price offered by the broker. Lets say 299p. The broker then makes a 1p spread per contract and if the share price falls you make the multiple. Ie. if you sell 100 contracts and the price falls 10p you make 100x10 = 1000p/£10.

Obviously, you can sell more contracts or trade for more of a price movement, but I think you get the drift.

The main point I am making here is if you have invested in RBS and you are unhappy at their performance you could hedge the investment with a trade like this.

Let's look at an example of this: I have just invested 10k in BP.

They are currently trading at GBP 556.45. That amount buys me nearly 18 shares.

Every time each share moves up GBP 1, I make 18 times that.

But then, news just in! There has been another oil spill in the Gulf of Mexico! (hypothetically)

What happens to my shares - they have lost a sizeable chunk of their value. Quickly put on a short on the spread betting platform and counterbalance the losses. So if we match it evenly you would need to trade GBP 18 per 1 GBP in price movement. This could require some decent margin from the spread betting broker. Also, be careful in determining what denomination the broker trades the share.

Some brokers trade BP’s share GBP 1 per penny in price movement; some will trade GBP 1 per 50p price movement - they are all different. So check!

I have personally used such hedging structures when trading shares like FEVR and GLEN and it has saved money, as well as much angst during challenging times.

There are a few things to keep an eye on. Penny shares will not be listed by most mainstream brokers. They are very illiquid and this means it is hard for the brokers to control risk, so they will not carry them as an option, although, most FTSE 350 shares will be available. The other thing is the spread. This is the difference between the buying and selling price offered by the broker. The bid/ask could rest 10p away from where the share price is trading on the exchange, so as soon as you enter a trade it will be in a loss. Sometimes this is the cost of the business and if you work your maths, targets and/or risk correctly, it could really save you.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.