Spread Trading the Dow Jones
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Over the last couple of years we have seen increased market volatility as the credit crunch and hesitant recovery have changed the face of the financial landscape. Nowhere has this been more obvious than the Dow Jones.
Many investors have been spread betting on the Dow Jones in an attempt to capitalise on the market swings. If you are looking to trade the US markets it is important to fully consider your options.
One thing to bear in mind is that you can get carried away when you start investing, particularly when thinking about the amount of money you might make. And making a profit is rarely seen as a bad thing. Still, investors have to remember that they won’t profit on every trade.
Whether you speculate on stocks or even if you invest via newer products, such as ETFs or CFDs, there are always risks.
As an investor looking to trade the financial markets you may find a range of trading options available. Currency markets? Individual stocks and shares? Commodities? Nowadays many investors are turning to financial spread betting. Spread betting offers a convenient trading option for both experienced traders and smaller investors.
We have talked about the fact that there are potential downsides to investing, you can lose money. From property investment to share trading, every form of speculative investment can result in a loss. With spread betting, these losses can be greater than your initial stake size.
The following risk warning also provides you with a couple of other handy pointers, ‘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. If necessary, seek independent advice’.
Spread Trading on the Dow Jones With a Stop Loss
Having said that, you are able to put a limit on the size of your position to help reduce your potential losses without impacting your upside. You can also employ smaller stake sizes such as £1 per point or $1 per point.
If you only want to gain a little exposure then you could trade the popular markets such as the Stock Market Indices, ie speculate on whether the Dow Jones, FTSE 100, German 30 or French 40 etc will increase or decrease.
If you speculate on the Dow Jones to go up, with a £1 per point stake, and it goes up by 120 points then you would make 120 points x £1 per point = £120.
You are also able to trade the markets in Euros and Dollars. If you want to trade in Dollars then 120 points x $1 per point = $120.
Of course if the market went against you, dropping by say 90 points, then with a £1 stake you would lose 90 points x £1 per point = £90.
Obviously this would be a fairly poor start. However, with firms like Financial Spreads you can add a Stop Loss at let's say, 30 points.
If you were betting on the Dow Jones this would mean that your bet would be closed if the Dow moved against you by 30 points. Therefore, instead of losing £90, you'd only lose 30 points x £1 per point = £30. (It should be noted that not all Stop Losses are guaranteed).
However, assuming you correctly predicted the direction of the market, your upside would still be £120 if it moved 120 points or £60 if the Dow Jones moved 60 points.
Advantages of Spread Trading on the Dow Jones
There are a wide range of benefits with spread betting, it is not all about risk management.
As a result of the large variety of available markets, spread betting is an investment instrument worth thinking about. Most spread betting companies offer thousands of international markets which range from indices, shares and currencies to commodities such as Gold, Oil and Copper.
Investors are able buy or sell financial instruments. This is very useful as it allows you to trade on a given market to move the way that you believe it will go. Spread betting does not force you to bet on a market to increase, you can speculate on a market to fall.
Financial spread betting is tax free*. There is no actual exchange of any assets; you are just spread betting on the future value of a market.
If you are trading stocks and shares then you normally face broker’s fees and/or commissions. When financial spread betting, trades are not subject to these costs.
You might be thinking, this sounds good but what’s the catch? Well, as we have said, there are downsides. Before speculating on the Dow Jones or any other markets, make sure you have fully considered the risks. Remember that Stop Losses and smaller stakes can help lower your risk.
For a fully worked example see: How to Spread Bet on the Dow Jones.
Indices Spread Trading Comparison
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| FTSE 100 Daily - Spread Size |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
| FTSE 100 Daily - Min Stake |
£1 |
£0.50 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| FTSE 100 Future - Spread Size |
4 |
4-8 |
6 |
4 |
4 |
3 |
4 |
4 |
| FTSE 100 Future - Min Stake |
£1 |
£0.50 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| Wall St Daily - Spread Size |
2 |
1 |
2 |
2 |
2 |
2-4 |
2 |
2 |
| Wall St Daily - Min Stake |
£1 |
£0.50 |
£1 |
£1 |
£1 |
£1 |
£1 |
£1 |
| DAX 30 Daily - Spread Size |
1 |
1 |
1 |
1 |
2 |
1 |
1 |
1 |
| DAX 30 Daily - Min Stake |
£1 |
£0.50 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| S&P 500 Daily - Spread Size |
4 |
4 |
5 |
4 |
3 |
5 |
4 |
4 |
| S&P 500 Daily - Min Stake |
£1 |
£0.50 |
£1 |
£1 |
£1 |
£1 |
£1 |
£1 |
| Nasdaq 100 Future - Spread Size |
3 |
4-10 |
4 |
3 |
3 |
4 |
3 |
3 |
| Nasdaq 100 Future - Min Stake |
£1 |
£0.50 |
£4 |
£1 |
£1 |
£1 |
£1 |
£1 |
Comparison Notes
The above comments do not constitute investment advice and neither Financial Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It 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 Financial Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Spread Trading the Dow Jones' edited by DB, updated 19-May-10
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