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Monday, 22nd April 2024
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Hedging a portfolio through spread betting Back  
Financial spread betting involves betting on the direction of a financial market without buying or selling the underlying instrument. Because of the relatively high level of gearing and the favourable tax treatment of profits, it can be a useful and effective method of hedging a portfolio or a currency exposure for the short to medium term writes Tony Judge.
IIf your portfolio consists of a number of ‘bell weather’ stocks such as banks and large established industrials, you may choose to sell one of the future indices such as the Dow Jones, the Nasdaq or the S&P depending on which is the most appropriate. This would offer some protection against a downswing in the market in so far as you would gain on this trade offsetting the lower share prices of your portfolio. You would be betting a certain amount per point that the index will go lower. There is no commission on spread bets and profits are exempt from Capital Gains Tax making this an attractive way of protecting yourself without incurring the costs associated with liquidating your portfolio. You may also spread bet on most individual shares to go down as well as up.

Some companies such as CRH depend for a great deal of their earnings on the US dollar, so the euro’s recent relative strength had a negative impact on their profits and consequently the share price suffered. In a case like that it may make sense to buy euro/USD for the current or the next quarter, although this is obviously a less exact method of hedging unless you are actually holding US dollars. For corporate customers, adverse swings in currencies can be hedged in the same way, thus removing the exposure on earnings

Sharespread.com offers daily and future prices to buy or sell all major indices, currencies, commodities and bonds as well as individual shares. They also offer markets on the House Price Index, which may be a useful method of protecting the value of your home if the doom and gloom merchants in the stock broking industry are to be believed! There is no commission or stamp duty to be paid on spread bets and it’s worth repeating that profits are exempt from CGT. For those with portfolios large or small, or for companies wishing to hedge currency exposures, it is well worth considering this method, which is new to Ireland but not the UK, which has an estimated 125,000 regular spread bettors.

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