Taking a punt on FTSE 250 companies

THERE are tax, leverage and other advantages to using spread betting to get exposure to equities. For some investors, of course, these benefits may not offset the time and skill needed to negotiate the spread betting markets. However, some markets are easier than others to manage, with the FTSE 250 the best place to start.

The main advantage is that “any profits you make on spread betting are not subject to tax of any kind,” says Michael Hewson of CMC Markets. Unlike dealing directly in equities, there is no capital gains tax or stamp duty to pay. The only tax downside is that “because it is a bet, traders cannot offset losses against capital gains,” says Manoj Ladwa of ETX Capital.

Spread betting is a leveraged product so the potential for profiting on rising share prices is huge. But this is a “double-edged sword”, according to Angus Campbell of London Capital Group. On the one hand, being able to leverage your position lowers the barrier to making serious profits compared with owning the equities, but on the other hand, traders can also lose a lot very quickly, potentially more than their original deposit.

The most popular individual equities for spread betters belong to the FTSE 100. qRio Tinto and Barclays are highly liquid, well traded, and volatile within a small range. This means that for short-term traders there will always be some movement and profits to be made. Ian O’Sullivan of Spread Co says the smarter traders know how to trade these by playing the levels and using charts. However, the skills required for such short-term trading may be unfamiliar to equity investors so the FTSE 100 is arguably not the best place to start.

With the FTSE 250, it is harder to profit from day-to-day volatility in the same way as the FTSE 100, yet it offers an opportunity for new betters in equities. David Jones of IG Index suggests that the FTSE 250 can be a good play over three or four months. If traders use a quarterly contract – in which all the costs are in the spread – they can run their positions more like a portfolio, provided they set up sensible stop losses to offset the downside risk. Jones sees this as a “less manic way” to spread bet. Good recent bets on the FTSE 250 include Bodcote, SVG Capital, Mondi and Rightmove. An investor with a position on Rightmove from 2009 could have had some of the action in its steady rise from 160p to 1,011p. A leveraged spread bet would have earned much more than just owning the equity. Smaller cap firms outside the FTSE 250 can be harder to deal in though, due to their wider spreads, increased volatility and illiquidity.

Alongside these advantages, spread betters need to be more proactive and willing to take on more risk than comes with buying equities, even when dealing in the relatively longer-term FTSE 250. But for any investors thinking of moving from equities to spread betting, dipping your toe in the relatively calm waters of the FTSE 250 is the place to start.