LONDON, May 2, 2012 /PRNewswire/ --
Following reports on 30 April 2012 that Apple was in negotiations with EPIX to start streaming films through its devices saw competitor Netflix's share price take a hit - falling 3% to rest at $80.14 a share on the Nasdaq.
In the below guide, I show you how to spread bet with City Index on falling share prices using Netflix as an example. I also discuss why you would place a sell spread bet on a market such as Netflix and also what happens if you are wrong, and that market starts to rise.
Double-blow for Netflix
Speaking to Reuters on 30 April, Netflix Chief Executive Officer, Reed Hastings attempted to stifle investor fears by revealing that the company was also in discussions with EPIX - a new online venture by Lions Gate Entertainment, MGM and Viacom - about how they could 'operate most effectively for both of us'.
However, the damage was already done with the news coming as another blow to the Netflix share price following a 16% fall just over a week ago (24 April) when they released better-than-expected first quarter earnings and revenue, but disappointing subscriber numbers.
Why Spread Bet on falling markets?
With a financial spread betting account, investors can trade on a market's movement, regardless of whether it is rising or falling.
Unlike traditional trading; you do not own the underlying asset. This means two things; one, easy access for a small initial deposit - investors can take a position on over 12,000 financial instruments for an initial deposit between 1% and 10% with City Index.
Secondly however, this means that there is a possibility that you can incur losses greater than your initial deposit, if the market moves against your position.
Why Spread Bet on Falling Shares
Using Netflix shares as an example, let us imagine it is 30 April 2012 and reports suggest an affiliation between Apple and EPIX.
By analysing Netflix shares thoroughly, you notice already that they are already under pressure having fallen dramatically from a poor performance on 24 April.
Therefore, you decide to go short and 'sell'.
How to Spread Bet on Falling Shares
In this example, spread betting provider City Index is offering positions on the Netflix DFT at 8255/8267 - their sell and buy price.
As you are going short and selling, you decide to take a position for £10 per point at 8255.
Within an hour, their share price has fallen 2.9% - but you decide to keep your trade open.
Later in the session the shares price has fallen to 8032 and the Netflix DFT is now trading at 8026/8038.
You decide to cash in your profits by buying back to close the trade at 8038 for £10 per point.
As a result, you net a tax-free* profit of £2170, i.e. (8255-8038) x £10 = £2170
Spread Betting Risks
Consider the above example; as a margined product, spread betting can provide the potential for significant profits when trading on a financial instrument - in particular, at time of volatility.
Margin however, is a double-edged sword; it can also present the potential for significant losses.
Consider the position you took in the above example on the Netflix DFT, and consider you had been wrong and the market has in fact moved against you and risen.
Had you let your losses accumulate after that initial hour, and returned to find the Netflix DFT trading at 8460/8472 (buying back at the buy price of 8472) - you would have incurred a loss of £2170, i.e. (8472-8255) x £10 = £2170.
With this in mind, it is imperative investors utilise the risk management tools available to them as City Index clients.
*Spread betting is currently exempt from UK stamp duty and Capital Gains Tax (CGT). However, UK Tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.
About City Index:
Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.
As a group, we transact in excess of 1.5 million trades every month in over 50 countries. We provide access to a wide range of instruments including margined foreign exchange, CFDs and, in the UK, financial spread betting with City Index.
We constantly look to improve the performance of our platforms and expand our range of services. The result is our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support. Visit http://www.cityindex.co.uk/ for details.
As a leveraged product, spread betting can result in losses greater than your initial deposit. It is imperative that you fully understand the risks and utilise the available risk management tools such as stop loss orders, when trading.
SOURCE City Index