Stock Market Futures and Trading the BP Share Price
Stock Market Futures and Trading the BP Share Price
The problems for BP are mounting and this has really been holding back the FTSE 100. As the FTSE 100's largest company, a drop of 300 pence in the stock equates to almost 220 points of the UK's leading share index.
The effect of this, plus weakness in the banking sector, can be clearly seen in the German DAX / FTSE 100 spread which has widened from 480 points on the first day of the leak to the current value of 950.
Common sense would seem to tell us that BP's price reduction is too far and too fast as the clean up costs cannot possibly equate to the loss in equity value. However, the problem in the back of everyone's minds is the memory that most people thought the same thing when the major UK banks were on the way down back in 2008.
Two years ago, many investors bought and bought Royal Bank of Scotland, Barclays, Northern Rock and Bradford and Bingley in the belief that things could not be as bad as the stock price was indicating.
The more recent theory that the US government could takeover 'BP claims processing' may well push the company over the brink. The US government would have no real interest in limiting payments and/or investigating fraudulent claims. The fear would be that BP would be swamped with demands over which it had no control, effectively handing the company to the US government.
With such a tricky position it's difficult to be absolutely sure about the direction of the BP share price. However, there are opportunities to trade the share price over small time periods. With CFD trading and financial spread betting, investors can speculate on the stock to go up and down.
Looking at IG Index, they are currently valuing the BP Rolling Daily market at 370.3p - 371.0p. As a result, an investor can spread bet on the BP share price:
a) Going higher than 371.0p, or b) Going lower than 370.3p
When you spread trade on UK stocks you trade in x per penny. So, if you chose to risk 8 per penny and the BP share price changes by 5p then that would alter your bottom line by 40. 8 per penny x 5p = 40.
Of course you can also trade in US Dollars or Euros. So, if you chose to risk $10 per penny and the BP share price changes by 6p then that would alter your bottom line by $60. $10 per penny x 10p = $60.
Now, if you think about the above spread of 370.3p - 371.0p and if you have done your analysis of the stock and you feel that the BP share price will go higher than 371.0p then you could opt to 'go long' of the market at 371.0p for a stake of 4 per penny.
This means that you make a profit of 4 for every penny that the BP shares go above 371.0p. Of course, it also means that you will lose 4 for every penny that the BP market falls lower than 371.0p.
Therefore, if after a few trading sessions the stock started to increase then you might think about closing your position so that you can realise your profit. So if the market were to rise, the spread could change to 390.5p - 391.2p.
You would close your trade by selling at 390.5p. Accordingly, with the same 4 stake this trade would result in a profit of:
Profit = (Final Share Price - Initial Share Price) x stake Profit = (390.5p - 371.0p) x 4 per penny stake Profit = 19.5p x 4 per penny stake Profit = 78 profit
All rather simple, however speculating on equities, via CFDs, spread betting or actually buying the stock, is rarely so straight forward. In the above example, you had speculated that the share price would increase. The share price could of course drop further and if so, you could close your trade in order to stop any further losses.
Should the spread pull back to 349.7p - 350.4p then you would close your trade by selling at 349.7p. If so, that would mean you would lose:
Loss = (Final Share Price - Initial Share Price) x stake Loss = (349.7p - 371.0p) x 4 per penny stake Loss = -21.3p x 4 per penny stake Loss = -85.20 loss
It is important to note that this is a Rolling Daily Market and so in contrast with futures markets, there is no settlement date. Therefore, if you decide not to close your trade by the end of the day, it just rolls over into the next day.
Should your trade roll over, if you are speculating that the market will:
a) Go higher - then you will often be charged a small financing fee, or b) Go lower - then a small payment is normally credited to your account
With financial spread betting you can lose more than you initially invested. Financial spread betting carries a high level of risk to your capital. Ensure that spread betting matches your investment objectives. Familiarise yourself with the risks involved. Where necessary, seek independent advice.
Note that you could also 'short' the market by selling at 370.3p. Note: BP Rolling Daily spread accurate as of 18-Jun-10.
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