By James Woolley
The FTSE 100 is an index that is made up of the 100 largest (listed) companies in the UK, in terms of market capitalisation. Not only does it give you an indication of how well the major UK companies are performing, but it is also a very good index to trade. Indeed there are three different ways you can trade this index.
First of all you could consider trading FTSE 100 options. If you are confident that the value of the FTSE 100 will rise in the future, then you could buy a call option. Conversely if you think that this index is overvalued, you could think about buying a put option.
Options trading is quite a complex subject, and is not an instrument that I personally trade myself. However they are useful for trading the FTSE 100 in both directions.
A second way to trade this index is through spread betting. This is not available in every country, but here in the UK it has two main benefits – it is a lot easier to understand than options trading, and you do not have to pay any tax on any profits made.
Spread betting is relatively straight forward. If the FTSE 100 is trading at 6000, you may be quoted a daily price of 5999-6001. So if you think the price is set to rise before the end of the day you would go long at 6001. You can close this position (for a profit or loss) at any time you want or you can simply let it close out automatically at the end of the day. Your profit is your stake per point multiplied by your profits (or losses) at the point the trade is closed.
You can trade this index on an intraday basis, like in the example above, or you can take longer positions using contracts that expire several months away. So it is very easy to go long or short of this index whenever you want.
A final way you can trade this index is by trading a FTSE 100 ETF. These are very popular with stock market investors because you can buy and sell them just like you would with ordinary shares. They can be placed in an ISA or pension fund and they are ideal if you think that this index is going to rise in the months or years ahead.
So as you can see, there are several ways you can trade the FTSE 100 index. Plus it is just as easy to go short as it is to go long, so you don’t necessarily have to wait patiently on the sidelines when you think the market is grossly overvalued.
About the Author
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