MARNOR INVESTMENT PARTNERSHIP LLP
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MARNOR INVESTMENT PARTNERSHIP TECHNICAL/Spread
INTRODUCTION TO SPREAD TRADING
Just for clarity for people with a moral code of conduct, spread trading is also called spread betting. The reasons for this is because this particular derivative is governed by certain betting laws.
This page is primarily concerned with how spread trading works and not the moral issues surrounding the concept of the word 'betting'. However, if anyone is concerned about it, we suggest further reading on various subjects such as: HOW TAX WAS FORMED, THE HISTORY OF TAXATION, TAX LAWS etc.
Spread trading is a derivative developed under betting laws and trading the stock market using this mode exempts the partnership from taxation, stamp duty, commission and any other governmental implementation regarding taxes. Having said that, because a vast number of investors are using this product, tax rules are likely to change in the future. But, for now lets' take advantage of this non-taxable way of trading.
Spread trading offers high leverage on money but does have a higher amount of risks associated with it. This is normally used for speculation and is fully tax free. Markets can include equities, Shares, Indices, Foreign Exchange, Bullions, Commodities, Treasuries and Bonds.
Spread trading allow us to 'bet' (stake per point) on whether the price is going up (long) or going down (short). The profit or loss in spread trading is therefore determined by the price at which we buy less the price at which we sell. Unlike the normal share trade where we physically own the financial instrument, we are merely betting on the movement of the share price of the underlying instrument. Now, this is not gambling! All positions that we open will be initiated by fundamental and technical analysis, just as with normal buying and selling of physical positions.
HOW IT WORKS
The process is quite simple, we are either betting that the chosen equity, bond, currency or index will either go up or down. we place an amount per point movement of the underlying instrument. This can be as small as £1.00 with the platform we currently use.
As with buying a normal stock we are hoping that the asset will move up or down in value. Where we are potentially gaining with spread trading is that we are only using a small amount of money to take advantage of the move.
Spread trading has different time frames, the most common is the daily cash bet. This is effectively a daily trade and will automatically close out at the end of the day. there is also a rolling cash bet that allows the trade to roll over until we closed the position. there is a small charge for rolling trades over.
We use stops to manage all our positions and sometimes a trailing stop to capitalise our profits. Stops are trading strategies used to enter or exit trades at a specified share price.
THE RISKS
As with all trades risk and reward walk hand in hand. Spread trading can be very risky if not managed properly. Our stategists used a technical sheet which they follow keenly to decide what the stake should be, the stop loss points, total exposure with the specific trading capital. VIEW SHEET (Not readable, this is to prevent replication)
SPREAD TRADING EXAMPLE
Lets assume we wish to trade an index rather than a stock, the principle is the same. If we take the FTSE 100 cash, where the dealer is offering a BID PRICE of 4377 and an ASK PRICE OF 4385, displayed as 4377/4385 or 4377/85
From our technical analysis we believe the market is going to move down so we place the following orders:
To open our position we sell (we are short selling) at 4377. But, before that there are a few thing we need to work out from our analytical sheet.
Let say our trading capital is £10,000.00 we would not place more than 5% of this on any one trade. From our sheet our maximum loss will be £500.00; our total exposure will be £6000.00; stake will be £1.40; our stop loss will be no more than 4734. This would be modified so £10 stake and a stop loss point of 50. We would place a stop at 4427 ( maximum loss if things go wrong woluld be £50)
Later in the day we close the position; the index is trading at 4306/4314, so we buy at 4314 at a £10 stake.
Therefore we sold at 4377
we buy at 4314
Difference of 63 points
times £10 stake == £630.00 profit**This is tax free at the moment but laws can change.
