Learn To Spread Bet Shares
Shares are the main instruments for spread betters
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When most people talk about financial spread betting, they are usually talking about trading on shares. While there are numerous securities that you can place bets on, it is probably fair to say that for most traders, individual equities remain the primary focus of spread betting activity.
You can use bets on individual companies to gain the required exposure without having to go through the traditional process of purchasing the shares themselves. In practice, the same investment principles that apply to traditional share trading also apply to spread betting on shares. Consequently, the same approaches are typically adopted for both activities.
There are two principal methods for analysing shares before deciding to spread bet. The two main approaches are explained below:
- fundamental analysis
- technical analysis
Fundamental Analysis of Shares
In simple terms, fundamental analysis of shares revolves around the use of a company’s historical accounting data to establish a valuation for the company’s shares. There are various accounting ratios and valuation metrics that are used for these purposes.
P/E Ratio: this measures the price of a share relative to the expected earnings per share. Don’t be discouraged, the maths is actually very simple. You simply divide price per share by earnings per share to derive the ratio. The P/E ratio is also known as the ‘earnings multiple’ or ‘price multiple’. This multiple indicates how much investors are willing to pay for the company’s shares per pound or dollar of its earnings.
PEG Ratio: this measure starts with the P/E ratio described above and adjusts it for the expected growth rate of earnings to establish a fair valuation for the shares in question. Again, the maths involved is very simple. You take the P/E ratio from the calculation above and simply divide that by the annual growth in earnings per share of the company. The PEG ratio is widely used in the City and on Wall Street as a good indicator of a share’s potential value. Indeed, this ratio is also widely preferred to the P/E ratio since it also takes growth into consideration in its assessment of value.
How to analyse shares before spread betting
Using Valuation Multiples
Whether you like the P/E ratio or prefer its cousin, the PEG ratio, there is one important point that you should consider before spread betting on this basis.
The valuation multiples described above are not particularly informative on their own. Knowing the P/E ratio or PEG ratio of a particular company’s shares is not sufficient. You need to be able to compare these with ratios of similar companies before you can make an assessment about whether the share in question is under valued or over valued. In making this comparison, it is crucial that the companies that you look at are very similar in the risks that they face. For this reason, most analysts would compare across share of companies within the same sector.
Technical Analysis of Shares
In simple terms, technical analysis of shares revolves around the use of historical price and volume data to forecast the likely future direction of share prices.
Unlike fundamental analysts looking at accounting and fundamental economic data, technical analysts do not focus on deriving a measure of a share's underlying or intrinsic value. Instead, they use stock charts and other tools such as indicators and the study of investor sentiment and psychology to identify patterns that provide evidence of likely future activity.
Technical analysis is a very broad topic with numerous approaches and methods of investment analysis. Unfortunately, a lot of these can be correctly described as mumbo jumbo! For practical financial spread betting purposes, you would be better off ignoring most of what passes as technical analysis because quite frankly, the will end up costing you substantial chunks of your spread betting capital. However, technical analysis can also be a very effective and profitable spread betting technique if you know what to look for. In most cases, the best approach is to keep it simple if you want to ensure that your spread betting is profitable.
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