Make Profits from Stock Indexes

Many traders trad the stock indexes like the S&Ps, the DOW, the FTSE and NASDAQ, instead of using futures they are using spread betting firms. The reasons for using these firms is that they require very small amounts of capital to get started, a trader can trade very small amounts and these firms make opening an account so easy. However, I have some serious considerations about using spread betting as a realistic tool for professional trading. The two biggest selling points are no commissions and no capital gains tax. There are many different costs to trading, commissions are one and the spread is another. Commissions are significant for an active trader and as an active trader you can get them very low, but suppose they are £8 per round turn for futures and the spread in FTSE futures is an average of 2 points. If the spread with a spread betting firm for FTSE is 6 points and assume that we are trading £10 a point we can compare the two trading vehicles. I made an average of 2.42 points per contract traded and I traded 48 times On Nov 2001. That is, for each contract I bought and sold I made £24.20 before commissions, assuming my commission rate is £8, I made a profit of £16.20 per contract traded, which is £777.60 net profit if my average size per trade is one contract.

There is another significant reason for trading the futures market instead of a non-exchange traded market such as those offered by spread betting firms. The futures markets are exchange traded and this means that they are fully transparent. Imagine the trading pit, as it used to be when traders stood physically in a ring trading with each other. When a trade is entered, the order goes into the pit and is represented there, free to be taken by any other market participant. We can all see what is happening, we trade with the same information and with the same advantages and disadvantages.

Suppose you are a trader who can only trade with one broker in the pit, you can trade as much as you like, any size you like, but he sets the spread he is willing to offer you and you have to trade at market, This broker doesn’t want to loose money, naturally, so he always makes his spread wider than the real market spread, he also, naturally, puts his interests before yours, so he won’t always be willing to trade when the market is moving fast and he is uncertain. Remember whenever you make money he loses, so he is very careful to maintain his advantage at all times. Who wouldn’t want to be in this brokers position? When you trade with a real futures broker, all the broker does is facilitate your trade; he gives you the ability to have you orders represented in the pit. A real brokers concern is that they execute your order as efficiently as possible. They naturally want you to make money because by making money you become a client who will continue to pay them commissions. Trading with a spread betting firm is absurdly costly, spread betting firms are like amusement arcades, they can be fun, but to imagine you are going to make your living from slot machines is illusory.