Spread betting

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9. Practical advantages - hedging

Another use of spread betting is as a hedge against movements in your share portfolio.

Suppose that you have a large portfolio of shares, some held directly, others through unit and investment trusts. You think that the market might fall on the announcement of key economic figures in a few days time, and you want to protect yourself against that risk.

Theoretically, you could sell your shares, wait for the market to fall, and then reinvest. But that would incur broker commissions and possibly capital gains tax liabilities. And if the market doesn't fall, you'll be kicking yourself.

One way round this is to place a spread bet. Specifically, you place a "sell" bet on the major stocks in your portfolio so that if the market does drop (lowering the value of your shares) you make a compensating profit on your spread bet.

Alternatively, instead of placing a bet on the movements of individual share prices, you place a bet on the movement of the index which has the closest match to your portfolio. If your portfolio is made up of large blue-chip companies, a spread on the FTSE 100 would be an appropriate hedge.

Hedging in this way is usually a short-term strategy, with positions being held for, say, three to four days. In fact the most common hedge is even shorter than that, and used by people with UK share portfolios dominated by technology stocks who sell the FTSE 100 spread to hedge against a major drop on overnight on the Nasdaq.

1. What is spread betting? 2. A brief history 3. Spreads on individual equities 4. Spreads on an index 5. Performance spreads 6. Other financial spreads 7. Practical advantages - leverage 8. Practical advantages - going short 9. Practical advantages - hedging 10. Practical advantages - volatile markets 11. Practical advantages - tax 12. Dynamics - think short term 13. Dynamics - the size of the spread 14. Dynamics - upside and downside 15. Dynamics - length of bet 16. Strategy - bet only what you can afford 17. Strategy - cutting losses 18. Strategy - stop losses and limited risk bets 19. Strategy - taking profits 20. Strategy - arbitrage 21. Opening an account 22. Placing a bet and managing your account 23. Regulation 24. Some more tips 25. Conclusion

• The Investors Guide to Financial Spread Betting