Question
If you expect the stockmarket to fall, what can you invest in that will go up as a result of a fall in the stockmarket and act as a hedge against the falls in share prices?
I'm sure I've read that you can do this but I can#t remember what you can buy and I'm not talking about absolute return funds.Answer
Profiting from falling share prices is called ‘shorting’ the market and there are two fairly straightforward ways for private investors to do this: exchange trade funds (ETFs) and spread betting.
ETFs are basically investment funds that are traded on the stockmarket, so you can buy them via stockbrokers (it should be possible to buy and sell for £10 or less online). A few ETFs short specific stockmarket indices, so (ignoring charges) for every 1% the index falls you’ll profit by 1%. There are also several that double your exposure (called ‘leveraging’), so for every 1% fall you’ll make 2% - obviously more risky.
Examples include the dbx Trackers FTSE 100 Short Daily and ETFS FTSE 100 Super Short Strategy (2x) ETFs.
Spread betting involves betting a fixed amount per point that an index/share price moves - you can choose up or down.
For example, suppose shares in Company X are trading at 100p and you place a spread bet of £10 per 1p (or ‘point’) that the share price falls. If the share price falls to 90p then you’ll make £100 profit, but if the price rises to 110p you’ll lose £100. The spread betting company will require you to put down an initial deposit (or ‘margin’) of around £50 in this example, but start losing money (even on paper) and this could increase.
As this simple example shows, both the risks and rewards can be high. On an initial £50 stake a 10% change in the share price could generate £100 of spread betting profit or loss, versus just £5 had you bought the shares. But, unlike buying shares, you can lose a lot more than your initial stake when spread betting. Mike Ashley, the Sports Direct founder famously lost £300 million in 2008 when a spread bet on the HBOS share price backfired.
Because shares have a difference (or ‘spread’) between their buying and selling price, this is reflected by the prices used by spread betting companies, in fact they usually add their own small margin too. So in our example Company X’s share bid price might be 99p and the offer price 101p, then 89p and 91p when you close the bet. Your gain would be 99p – 91p x £10, i.e. £80.
On the plus side spread betting allows you to short a wide range of shares/indices and there’s no tax on profits nor any stamp duty. However, there is considerable risk, especially on larger bets per point of movement, so it’s not for the faint-hearted.
If you expect the stockmarket to fall, what can you invest in that will go up as a result of a fall in the stockmarket and act as a hedge against the falls in share prices?
I'm sure I've read that you can do this but I can#t remember what you can buy and I'm not talking about absolute return funds.Answer
Profiting from falling share prices is called ‘shorting’ the market and there are two fairly straightforward ways for private investors to do this: exchange trade funds (ETFs) and spread betting.
ETFs are basically investment funds that are traded on the stockmarket, so you can buy them via stockbrokers (it should be possible to buy and sell for £10 or less online). A few ETFs short specific stockmarket indices, so (ignoring charges) for every 1% the index falls you’ll profit by 1%. There are also several that double your exposure (called ‘leveraging’), so for every 1% fall you’ll make 2% - obviously more risky.
Examples include the dbx Trackers FTSE 100 Short Daily and ETFS FTSE 100 Super Short Strategy (2x) ETFs.
Spread betting involves betting a fixed amount per point that an index/share price moves - you can choose up or down.
For example, suppose shares in Company X are trading at 100p and you place a spread bet of £10 per 1p (or ‘point’) that the share price falls. If the share price falls to 90p then you’ll make £100 profit, but if the price rises to 110p you’ll lose £100. The spread betting company will require you to put down an initial deposit (or ‘margin’) of around £50 in this example, but start losing money (even on paper) and this could increase.
As this simple example shows, both the risks and rewards can be high. On an initial £50 stake a 10% change in the share price could generate £100 of spread betting profit or loss, versus just £5 had you bought the shares. But, unlike buying shares, you can lose a lot more than your initial stake when spread betting. Mike Ashley, the Sports Direct founder famously lost £300 million in 2008 when a spread bet on the HBOS share price backfired.
Because shares have a difference (or ‘spread’) between their buying and selling price, this is reflected by the prices used by spread betting companies, in fact they usually add their own small margin too. So in our example Company X’s share bid price might be 99p and the offer price 101p, then 89p and 91p when you close the bet. Your gain would be 99p – 91p x £10, i.e. £80.
On the plus side spread betting allows you to short a wide range of shares/indices and there’s no tax on profits nor any stamp duty. However, there is considerable risk, especially on larger bets per point of movement, so it’s not for the faint-hearted.
Read this Q and A at http://www.candidmoney.com/questions/question289.aspx
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