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  • Understanding the Markets

    Understanding the Financial Markets

    When spread betting, it is imperative that you understand the markets on which you are trading so you can speculate their future direction more effectively and hopefully enjoy a more fruitful spread betting experience.

    By analysing and researching the factors which could potentially affect the future price movement of your chosen market, you will be in a better position to maximise profits and manage your risk.

    How Does This Help Me?

    There are multiple factors, such as company earnings, economic data, natural disasters, broker recommendations and price trends that can move market prices and affect both sellers and buyers.

    For example, if there is a piece of economic data that is likely to move the FTSE when you have an open spread bet, you will be in a more informed position to trade successfully when that data is released and starts to influence the price of the FTSE.

    Tip: Our dedicated Economic Calendar is designed to help you to increase your awareness of these factors so you can better trade the markets.

    In this section, we offer an overview of what the financial markets are, what an index is and how we derive our spreads from their underlying value.

    What is a Financial Market?

    Whilst the term ‘financial market’ is considered to be fairly broad – it can be summarised as a market place where traders and investors buy and sell assets such as shares, commodities, bonds, etc.

    Investors, traders and institutions buy these assets primarily for investment purposes on the expectation that the value of their holdings will increase over a period of time.

    The equilibrium attained between supply and demand is the key element that dictates the prices of each asset and that equilibrium is constantly moving as investors, traders and institutions on both sides of the supply and demand sphere react to elements such as data and earnings, which affect their perception of the value of the asset.

    For example, if an investor owns shares in Barclays, but the bank reports weaker than expected earnings, this is likely to increase the amount of sellers of Barclays’ shares, thus the equilibrium between supply and demand changes and forces down the price of Barclays’ shares.

    At Finspreads, we offer our clients access to thousands of financial markets, including:

    • Indices 
    • Shares
    • Currencies
    • Commodities
    • Bonds

    Spread Bet Prices are Derived from the Underlying Market

    Spread betting is an alternative to traditional trading as it is a derivatives product, meaning that all spread bet market prices are derived from the underlying market.

    In this sense, our Vodafone Daily Funded Trade (DFT) spread bet market will track the underlying Vodafone share price to the penny, as prices move.

    As a derivative, when you spread bet you do not actually own the underlying market – instead, you are simply speculating on the future price movement of the underlying market, such as Vodafone’s share price.

    Find out how spread betting is different to shares trading in our Spread Betting vs. Shares Trading section.

    What is an Index?

    An Index is the price value given to a basket of assets such as shares or currencies.

    The FTSE 100, for example, is an index of the top 100 stocks traded on the London Stock Exchange by market capitalisation.

    The Dollar Index on the other hand is an index of the US dollar against a basket of other currencies such as the pound sterling or euro.

    Tip: Indices such as the FTSE 100 give a stronger weighting to the largest market capitalised stocks such as HSBC, Vodafone and BP. As such, a small move in these stocks may have a larger bearing on the FTSE 100 than a bigger move in, say, Vedanta Resources which has a smaller weighting.

    What is a Share?

    A share is a unit of ownership of an asset or entity.

    When referencing the financial stock market, shares in public companies are traded amongst investors and corporations and their value is dictated by a number of factors such as demand for shares versus those which are available, i.e. supply, the fundamental strength of that company and corporate actions.

    Tip: Keep an eye out for breaking news, earnings reports and broker actions, which can all affect the pricing of shares in the short term.

    What is a Currency Pair?

    A currency pair, or forex pair, is the structure given to the trading of currencies, from which a value is set to exchange one currency for that of another such as the GBP/USD.

    The first currency in a pair is called the ‘base’ currency, whilst the latter in the pair is referred to as the ‘quote’ or ‘counter’ currency.

    Tip: Currency pairs are typically referred to as majors, minors and exotics, with the major pairs consisting of the most heavily traded currencies such as the US dollar, pound sterling, euro and yen.

    What is a Commodity?

    A commodity is a good that can be bought and sold on the free market for multiple reasons such as production of goods and services as well as market speculation.

    The equilibrium between supply and demand are the two key elements that affect the pricing of commodities, whilst multiple short term elements such as weather, production and money flows can also affect prices.

    Tip: The price of crude oil can have a huge influence on the pricing of other assets such as stocks and specifically airlines or shipping firms, where oil is typically one of their most expensive costs.

    What is a Bond?

    A bond is a form of investment in debt, whereby the investor loans an entity money for a period of time and at a fixed interest rate for that time period.

    Tip: Bonds such as German Bunds or US Treasuries are typically seen as ‘safe haven’ assets and the demand for these two bonds typically increases during times of economic uncertainty.

    Deciphering our Spread

    With a spread betting account, you can trade on the future price movements across thousands of global financial markets through the Finspreads trading platform.

    These include the shares of individual companies such as Vodafone, commodities such as gold, global currencies including the major EUR/USD and GBP/USD and of course, indices such as the FTSE 100.

    Find out more about the Range of Markets available to spread bet. 

    In the graph on the following page, we show you how we decipher our ‘spread’ around a financial market’s underlying value.

    Find out how to spread bet the financial markets.

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