Spread Betting Review

GLOSSARY

ABS

Asset-backed securities; ie. securities backed by mortgage loans or such like which are obtainable if the creditor defaults.

Account Limit

The total amount of deposit required from a client at any one time based on the size of the trade.

Actuals

The physical assets behind commodity securities.

ADR

American Depositary Receipt. These are shares of foreign companies listedon exchanges in the USA

After hours deal

Aka as after hour trading. The stock exchange closes at 4.30pm but deals are often done after this time and the transaction dated the following day. Some spread betting providers will make a market on different products even after the underlying exchange has closed or before it is open - for instance even though the LSE closes at 4.30pm it might still be possible to trade BP up till about 9.00pm

AIM

the Alternative Investment Market, a UK trading market used by smaller companies looking to raise finance. AIM listed shares avoid full compliance with LSE rules.

Alexander's Filter

A method that measures the rise or fall of a share price in percentage terms over a given period. A fast rate of increase suggests a buy; the reverse, a sell.

Allotment letter

A document showing that you have been allotted a certain number of newly issued shares.

Alpha

Derogatory term used mostly by IG traders to denote clients who only spreadbet to take advantage of arbitrage situations.

American Option

Can be exercised at any time during the life of the contract. European options, by contrast must be exercised on the expiry date.

Annual general meeting (AGM)

Every company must have an AGM each year, to allow shareholders to vote on the accounts, directors and dividends and question the board on the company's affairs.

Annual Report

The yearly independently audited report to shareholders which must be produced by all publicly quoted companies.

Arbitrage

The action of profiting from the difference in price for similar securities in different markets. Also, the attempt to profit by exploiting the price difference for the same financial instrument from one spread betting company to that of another. So basically here bettors take advantage of quotes in the same market where there is a divergence of opinion between spread betting providers so that by buying with one firm and selling with another they can guarantee themselves a profit no matter what the final outcome of an event.

Articles of Association

A document setting out the objects and administration of the company.

Ask

also called 'offer'. Indicates a willingness to sell a future or share at given price. Opposite to Bid.

At best

An order to a stockbroker to get the best possible price he can obtain for your benefit as opposed to limiting your order to a fixed price.

At the money

where the strike price of an option is equal to the current market level. For example FTSE 100 index is trading at 6,100 in the cash, then the 6100 series of option will be at the money.

Auction

a system in which buyers and sellers enter competitive bids and offers simultaneously.

Auto Sales

Car sales are tremendously important to the US economy but their volatility can make them an unreliable indicator. New models introduced at the end of summer and in early spring tend to have a disproportionate influence on sales figures. That said, strong figures are a good sign that consumer demand is picking up. They can be seen as indicating higher future production if demand is sustained over three or four months. The size of the item in question and the timeliness of the release allow auto sales to be a useful leading indicator of retail sales and personal consumption expenditures data.

Release Date: Around the 13th of each month
Release Time: 13:30 GMT

Bear Market

A market distinguished by declining prices.

Bet Size

Governs how much you make or lose on a spread bet for every point of movement in the price of the market.

Bid

A spread betting price is made up of a level at which you can sell and a level at which you can buy. The level at which you can sell is always the lower of the two prices and is called the bid.

Binary Bet

A special form of spread bet with only two outcomes at expiry – if a specific result is achieved (for example, the FTSE to finish up at the end of the trading day) the bet is closed at a level of 100. If the result is not achieved, the bet closes at 0. Binary bets therefore have something in common with a traditional fixed-odds bet, except that we make a continuous price for the binary, between 0 and 100, allowing you to close your bet out before the final settlement to cut your losses or take your profit early.

Bonds (or Government Bonds)

Essentially an IOU issued by a borrower to a lender. Bonds are usually fixed-interest securities issued by governments, but can come in a variety of different forms. With a fixed-interest bond, the borrower normally makes interest payments on specified dates, often twice-yearly.

Break Even

The break-even is the value on expiry at which no profit is realised on an option position. A 5300 FTSE Call bought at 14 means you will have a break even of 5314 (5300 + 14).

Similarly, a 5300 FTSE Put bought at 16 has a break even at 5284 (5300 – 16), as the market has to fall for the Put to make money.

Broker Ratings

Buy, sell, or hold recommendations or ratings given to individual company stocks by securities analysts, depending on how they think the stock will perform in the short- or long-term.

Bull Market

A market distinguished by rising prices.

Cable

Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted between the London and New York exchanges via the transatlantic telegraph cable beginning in the mid 1800s.

Carry Trade

An investor sells a certain currency with a low interest rate and uses the funds to purchase a different currency at a higher interest rate, thus capturing the difference – or profit – between the two rates

Charts

Visual representations of raw data. Investors can learn to spot recurring patterns in financial charts to help them make informed decisions on a market or a company.

Commodity

A basic good used in commerce which is usually uniform across producers and can be traded on an exchange. Soft commodities are goods that are grown, such as coffee and sugar, while hard commodities are extracted through mining, such as gold and coal.

Crude Oil (and/or WTI)

The unrefined state of petroleum, Crude Oil is one of the world’s most important and well-traded markets. WTI or West Texas Intermediate is a type of low sulphur crude oil or sweet crude, used as an oil benchmark or marker.

CSCE

Coffee, Sugar and Cocoa Exchange

Currency Pair

The two currencies that comprise a Forex rate. A forex rate is the amount that the first currency in the pair is worth expressed in terms of the second currency.

Daily Funded Bet (DFB)

A long-term bet on the cash price of an underlying instrument. Each day your bet remains open, we make a cash adjustment to your account to reflect the funding costs of your bet. We will also make dividend adjustments when applicable.

Dealing Spread

Difference between the two ends of our quoted price. You make an Up Bet ('buy') at the higher end of the spread and make a Down Bet ('sell') at the lower end of the spread.

Dividend

The part of a company's profits distributed to shareholders, usually on a regular basis. An interim dividend is paid at the half-year stage and a final dividend at the end of the full year.

EUREX

European Exchange, Frankfurt

Ex-dividend

A share bought without the right to receive the next dividend which is retained by the seller.

Federal Reserve (FED)

The Central Banking system for the United States.

Financial Spread Betting

Betting on the price movement of a financial instrument, such as shares, currencies and indices. Two prices are quoted – the bid and offer price – the difference between which is the spread. The bet is on whether the future price of the instrument will be higher than the offer price or lower than the bid price.

FTSE

The FTSE 100, 250 and 350 are the best-known stock indices in the UK and are used primarily to bench mark the performance of UK companies by market capitalisation. The constituent companies within each index are calculated quarterly. Informally known as the ‘Footsie’, the indices are maintained by FTSE Group, which is jointly owned by the Financial Times and the London Stock Exchange.

Gearing (also see Leverage)

The relationship between potential profit or loss and the initial outlay. A position with high gearing or leverage stands to make or lose a large amount from a small initial outlay. With IG Index, the initial outlay is normally the deposit for the bet.

Gross Domestic Product (GDP)

One of the measures of national income and output for a country's economy; the total value of all final goods and services produced by the economy.

Guaranteed Stop

A Stop-loss order that puts an absolute limit on your liability, eliminating the chance of slippage and guaranteeing an exit price for your trade.

Hang Seng Index

the index for the thirty three largest companies on the Hong Kong Stock Exchange.

Hedge

A strategy to reduce risk by betting against an adverse movement in share prices, commodity prices or currencies. For example, if you hold dollar-denominated investments (or shares in companies whose earnings are in dollars), a spread bet that the dollar will fall will compensate you for the negative affect on these investments.

High Yielding Shares

High yielding shares are those shares which offer a high rate of return or dividend. For those buying shares, they are less risky than growth stocks (see definition) because they are not expected to grow so quickly and so any setbacks will have less of an impact on share prices. This advantage is, however, turned into a disadvantage for those betting on individual share prices because any fluctuation in the price is usually minor and tendency to buck the trend modest.

Income Tax

A UK tax on income. The Inland Revenue has however unfortunately left the rule regarding Income Tax on Spread Betting rather a grey area. Our best understanding is that profits are free of Income Tax if you can demonstrate you have another source of income on which you are able to support yourself - such as a salary or pension. If you rely solely on your profits from Spread Betting to live, you may have to pay Income Tax on those profits. If you are unsure of your tax position you should contact an accountant.

Index

This is a way of summarising a group of similar assets into one number (e.g. the top 250 UK shares are combined into the FTSE 250 index). An index usually consists of a weighted average of a group of shares in the market, such as the Wall Street index or FTSE 100, commonly used as a barometer of how that market is faring, also an instrument which you can spread trade.

Intrinsic value

Investors try an predict cash flows of a company into the future. They estimate growth rates etc to conduct this. Once they have have their future figures, they then discount these figures back to get the present value ( i.e. today's value). Therefore, if their calculated figure is higher than the current market price, the share is undervalued by the market and you should buy. If the calculated figure is lower than the current market price, the share is overvalued by the market and you should sell. A perfect example of this was the time of the dot-com, where the intrinsic value for so many companies was below the market value, indicating a sell. As we all know, as time elapsed, these dot-coms crashed.

In the case of a call option, an option has intrinsic value if the strike price is lower than the current value of the underlying market. In the case of a put option, an option has intrinsic value if the strike price is above the current level of the underlying market. The intrinsic value is the difference between the current level of the underlying and the strike price.

IPO

An IPO (initial public offering) is a way for a private company to go public and acquire a stock market listing. An IPO is when a company first issues shares and investors are offered the chance to buy shares at a set launch price. How many you can buy will depend on how popular they are. An IPO is very expensive, so the company may only extend the opportunity to institutional investors. Larger companies may make shares available to the public. The scope of an IPO is two-fold: 1) to raise cash for the company and 2) it will enable the founders and venture capitalists to sell some of their holdings for a profit.

Margin

The amount required from a client – in addition to any deposit due – to cover losses when a price moves adversely. Sometimes called 'variation margin'.

Monetary Policy

The procedures by which a government or central bank seeks to affect macroeconomic conditions by influencing the supply and availability of money.

Option

A type of derivative which confers the right but not the obligation to buy or sell some underlying asset at a specified price before a specified date. We offer bets on Options and we also provide a detailed introduction to Options in the client area of our website.

Pip

A ‘Percentage In Point’ is generally, though not always, the fourth decimal place, i.e. 0.0001. Traditionally, a pip was the smallest point by which a forex rate could move; with modern advances in precision this is no longer the case, though.

Quote

The two-way market price that we are making for a given instrument; because it is two-way, you can buy or sell, according to whether you think the price will rise or fall.

Range trading

a share or an index often trades within a certain price range. Range trading is about buying at the low end of the range (on the hopes of a price rise to the high end of the range). Conversely, traders will sell at the high end of the range (on the hopes of a price fall towards the low end the range).

Recovery Stocks

These are the shares of companies which have been going through a difficult path. They may be firms which have been successful in the past, but which have seen a drop in profits because the general market is poor, or they may be shares which have not met investor's expectations, or which are failing.

If you bet on these shares when they have hit the bottom of the cycle, or at the end of the recession, you could bet on them making a large and unexpected gain when they start to move up again.

Red Herring

A term used for preliminary prospect uses for a new issue used to measure market sentiment for the in the security. The key figures on such an announcement, such as the profit forecast, will always be deliberately left blank.

Regulation S

Regulation S was crafted as a safe harbor that allows US public companies to sell shares to non-U.S. citizens. In essence, while regulators wanted to assure that U.S. investors had adequate access to information about public companies, non-U.S. residents were not afforded the same protection. Those non-U.S. residents would be permitted to buy and sell shares, among themselves, even though the issuer had never registered those shares with the SEC.

In other words, companies were given license to do abroad what they could not do at home - dump shares on the marketplace without registration or disclosure.

To qualify for a Regulation S exemption, the shares must be sold offshore to a non-U.S. resident, and may not be sold back into the United States for one year. Those requirements are not as stringent as they may seem at first blush. The U.S. market is foreclosed to re-sales for one year, but that leaves the rest of the world - and the market for U.S. public companies is thriving around the globe.

Relative Strength Index (RSI)

One of the most widely used indicators by short-term traders is the Relative Strength Index (RSI). This compares the number of days that an index finishes higher against the number that it ends lower. It ranges in value from 0 to 100 and is generally considered to be showing overbought conditions if it reaches 70 or more and oversold if it approaches 30, although some traders prefer to use 80 and 20 respectively. It doesn't compare the relative strength of different securities as the name suggests, but it only shows the performance of just one security.

Reversal Day

A term used to describe the day on which a security makes a significant change of direction in terms of its price. The term is not applied until the security has made a significant change in the opposite direction to the previous trend.

Risk

the possibility that the real return of an investment will be worse than expected. This could mean losing some, or all, of the original investment.

Roll over

Rollover is the closing of an open bet and the opening of a new bet for the same amount at a point in time; typically incurs a charge for futures style bets. It allows you to transfer a trade that is near its expiry date to the next expiry date. Rolling over is a facility offered by a spreadbetting firm to those clients whose financial positions are due to expire within a short time and want to roll them into the next contract month. Normally clients can roll positions from the expiring contract to the next contract month for a reduced spread.

Rolling contract

A spread bet with no fixed expiry date, or an expiry date years in the future.

RSI

Relative strength indicator. A technical indicator based on the momentum of prices in a preceding 14-period block. A reading above 70 (out of 100) is classed as 'overbought'; a reading below 30 is deemed oversold.

S&P500 Index

Also known as SPX500. Standard and Poor's American stock market index. The index of 500 of the largest companies on the official list of the New York Stock Exchange.

Scrip or Bonus Issues

Shares are split or bonus shares are offered to reduce the current share price and improve liquidity/marketability. If a share price rises sharply the company may issue free shares to existing shareholders. So, for example, if a shareholder holds 500 shares in a company worth 200p each their holding would be worth £1,000. If the company made a one-for-one scrip issue they would now hold 1,000 shares but they would be worth 100p, The effect of this is that although everything continues as before the share price falls.

Short Selling

Same as Shorting below. A transaction whereby an investor borrows stock from a shareholder for a fee and with a guarantee to return theequity at an agreed later date. In theory, the borrower is anticipating a decline in the share price, which will allow them to benefit from the differential between the price at which they sell the borrowed stock and the price at which they repurchase it. For spreadbetters, it is selling the hope that the stock will decline. The trade is then closed by buying – the'long' – to balance the book.

Slippage

Slippage is an unpleasant word for an unpleasant event. It's the experience of not getting filled at (or even very close to...) your expected price when you place a market order. This can happen because either: market price is simply moving too fast, the market is not liquid or you're talking to an unmotivated broker. Or, of course, all three. In spread betting this can occur if the market closes just short of your stop level and then opens up the next day a long way through you will be stopped out at the level that the market opens up at the next day and not at your stop level.

Spread trading

a term used in the US to refer to spread betting. Spread Trading is officially called Spread Betting in order to maintain its tax-free status - see 'Tax treatment' for an explanation of our understanding of the current tax rules regarding Spread Betting/Trading.

Stamp duty

This is a government tax of 0.5% paid by the buyer on all share transactions. No stamp duty is applicable on spread bets.

Stock Markets

There are three stockmarkets in the UK. The main one is the London Stock Exchange (LSE), which lists more than 900 companies. Companies quoted on this stockmarket must comply with strict rules in terms of size, how long they have been operating and how they are run.

The Alternative Investment Market (AIM) was launched in 1995 for companies that don't meet all the criteria for an LSE listing. It is the first rung on the publicly quoted ladder for small, growing companies but, as these organisations are less developed, AIM shares tend to be riskier than those on the LSE. There are 700 companies listed on AIM.

The third is Ofex, short for 'off exchange'. Also launched in 1995, this is for unquoted companies that have issued shares. There are currently 150 companies trading on Ofex. Because of their size and the scarcity of information published about them, Ofex is the riskiest market in the UK.

Stop-loss

a way of limiting losses on shares or spread bets. You simply tell your broker or spread betting company that if a share price falls to a certain level, your shares or your spread bet must be sold, no matter what. A stop-loss can specified in percentage terms or in price terms. For example, you can either set the stop loss at 10 per cent below the price you paid, or at 90p if you bought at 100p.

Underlying instrument

1. In options, the security that must be delivered if a put or call option is exercised.
2. In equities , the common stock that underlies certain types of securities such as warrants and convertible bonds. Aka as Underlying market.

Variation Margin

The amount of money owed by a spread better when holding open positions and they are in a negative position. This is the money you have on deposit with the spread betting company which you are not currently using (sometimes referred to as free equity). More information about Initial and Variation Margins is given here. If a position has moved unfavourably since it was opened, a deposit further to that paid as the initial margin may be required in order to keep the position open (known as a 'margin call'). Variation margin is also known as 'maintenance margin'.

Venture Capitalists

Typically a new company starts trading on savings and bank borrowings taken out by the founders. After incorporation, shares are created with the founders owning most of the share capital. However, in most cases a company will need further cash injections to expand and this is where venture capitalists come in place. Venture capitalists buy shares in the company for which in return they get to own a piece of the company and have a say in the board. This primary injection of outside capital is referred to as a first stage investment. The first offering of shares is not usually the last and more shares may be created via rights issues and share placings to allow the company to raise further rounds of finance (which will come from other venture capital fund investors). If the company turns out to be successful it may ultimately decide to list in the market as an IPO.

Virtual trading

some spreadbetting companies provide a virtual platform that mirrors that real money trading platforms. These virtual accounts are funded with 'play' money in order to give the client the opportunity to practice spread betting risk-free.

Yield

the rate of return on an investment, usually expressed as an annual percentage rate.

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