Broker Ratings
Trading Tips - 19 March 2015 |
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Trading Tips, Broker Ratings and What If? |
Looking at the broker ratings for 16 March 2016, ARM Holdings last traded at 995.0p but Bryan Garnier & Cie think that the ARM Holdings share price could increase by 31.70% and hit 1310p.
Of course, investors should remember that these 'broker recommendations' are just opinions and they shouldn't be taken as investment advice.
However, your own analysis may also suggest that the ARM Holdings share price is looking undervalued.
If you wanted to speculate on ARM Holdings and the last price was 995.0p then remember that, in order to create the 'spread', companies like Financial Spreads typically only add 0.05% to either side of the underlying market.
Therefore, Financial Spreads might give the ARM Holdings market a spread of 994.3p - 995.7p.
This means that you can spread bet on the share price to:
Rise above 995.7p, or
Fall below 994.3p
When you spread bet on UK equities you trade in £x per penny. So if you risked £4 per penny and the ARM Holdings share price changes by 5p then that would change your profits (or losses) by £20. £4 per penny x 5p = £20.
When spread betting, most investors like to trade shares using 'rolling' trades like the Financial Spreads 'Rolling Daily' markets.
There is no set closing date for a Rolling Daily market. If your trade is still open at the end of the trading day, it will rollover to the next day.
If your trade rolls over and you are spread betting on the market to:
Rise, then you'll be charged a small overnight financing fee, or
Fall, then you'll often receive a small credit to your account
Note that Rolling Daily markets are available with firms like InterTrader, Financial Spreads and Capital Spreads. With these firms the financing fee is usually charged at LIBOR + 2%. For more detail, see Rolling Daily markets.
What if the Broker Rating is Right? |
Let's say you see the Bryan Garnier & Cie 'Buy' rating for ARM Holdings and your own analysis of the share price also suggests the FTSE 100 company is undervalued.
Therefore, if one of the spread betting companies is showing a spread of 994.3p - 995.7p you could buy at 995.7p.
So let's say you buy the market for £2 per penny. If so, you make a:
- Profit of £2 for every penny that the ARM Holdings shares move higher than 995.7p.
- Loss of £2 for every penny that the share price falls below 995.7p.
How to work out your P&L:
If you Buy a spread bet:
- Calculate how far the market has moved by subtracting the Opening Price of the market from the Closing Price (this could be a negative number)
- Multiply that price difference by your stake to give your P&L
If you Sell a spread bet:
- Calculate how far the market has moved by subtracting the Closing Price of the market from the Opening Price (this could be a negative number)
- Multiply that price difference by your stake to give your P&L
Back to the example.
Let's say the share price does increase by 31.70% and gets to the Bryan Garnier & Cie target price of 1310p.
If so, the spread betting market might move to 1309.0p - 1311.0p. Therefore, you could guarantee your profit and close your trade by selling at 1309.0p.
So, with the same £2 stake your profit would be calculated as:
P&L = (Closing Price - Opening Price) x stake
P&L = (1309.0p - 995.7p) x £2 per penny stake
P&L = 313.3p x £2 per penny stake
P&L = £626.60 profit
What if the Broker Rating is Wrong? |
Of course your research could be wrong, as could the broker's opinion. Let's say the FTSE 100 company fell by 25% to 746.3p.
If so, the spread could move to 745.7p - 746.9p.
Therefore, rather than incur a lot of overnight rolling costs, and run the risk of a further drop in the share price, you might choose to close your position in order to restrict your losses.
With the spread now at 745.7p - 746.9p you would close your trade by selling at 745.7p. If so, you would lose:
P&L = (Closing Price - Opening Price) x stake
P&L = (745.7p - 995.7p) x £2 per penny stake
P&L = -250.0p x £2 per penny stake
P&L = -£500.00 loss
Please note that the above prices and spreads are for example purposes only.
Note that a 31.70% move is a large move so your trade may have been open for some time. If so, your P&L would need to be adjusted by any rollover/overnight financing fees.
If a company goes ex-dividend whilst your trade is open then that can also add an extra cost to any buy trades and an extra profit to any sell trades.
IG Index » "With IG Index you get all the normal advantages of Spread Betting plus 8000 markets, narrow spreads, advanced charting, 24 hour spread betting ..." » read
IG Index review.
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Risk Warning: Financial Spread Trading and CFDs carry a high level of risk to your capital. You may lose more than your initial investment. They may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by IG which is authorised and regulated by the Financial Conduct Authority (FCA), FCA Register number 114059.
'Broker Ratings' edited by IG Index, updated 19-Mar-15
Related Articles:
Historical Brokers Tips and Recommendations, updated 18-Mar-15
This is a useful report if you want to check the broker ratings for the last trading day. We also have the latest Buy and Sell recommendations on UK equities, with target levels and... » read report.
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