Spread Bet Falling Share Prices Following Spain's S&P Downgrade

Spread betting with City Index enables investors to take a position on a market's price movement - regardless of whether it is rising or falling.

Following the downgrade of Spain's long-term sovereign credit rating on Friday 27 April 2012 by US-based financial services company Standard and Poor's (S&P); share prices on European markets such as the IBEX suffered a decline in Friday's trading.

Spain Downgraded

The two-place downgrade by S&P from a rating of A to BBB+ on Friday, is another blow to Spain's already flagging economy following their unemployment levels hitting record highs in almost two decades last week.

Unemployment shot up to 24.4% in the first quarter whilst retails sales slumped for the twenty-first consecutive month.

Foreign Minister Jose Manuel Garcia-Margallo stated in a radio interview that the figures are 'terrible' for everyone and the government and that 'Spain is in a crisis of huge proportions'.

Standard and Poor's downgrade came on the back of cited risks following an increase in bad loans at Spanish banks - whilst calling on Europe to take action to encourage growth.

Ripple Affect across Spanish Stock Markets

A shadow was cast over the European markets following the negative data out of Spain during Friday's trading, causing a ripple effect across the Spanish IBEX Index during early trading, whilst the CAC 40 and DAX 30 also suffered initial losses before recovering to close higher on the day.

By 9:56 BST on 27 April, the CAC 40 was up only 0.03%, however, the market recovered somewhat; closing up at 0.63% having opened at 3214 and closing at 3262.

In the same instance, the German DAX had dropped 0.09% as of 9:56 BST, however, at the close of trading on 27 April the market had recovered; trading up by 1.00% after closing 67.6 points higher.

Spread Betting on Falling Markets

 Whilst the French and German markets eventually recovered during trading on 27 April; the fall in Spanish stocks and the initial opening losses in the DAX 30 presented multiple opportunities to investors looking to profit from their falling share prices earlier on in the day.

Looking more closely at the DAX on the 27 April - whilst it closed up by 67.6 points; the market had slumped 87.2 points to 6651 from its opening price of 6738.2.

Had a spread bettor been prepared and taken a sell position on this particular market, they could have potentially profited from this fall in the market's share price.

Spread Betting Example

For this example, imagine that you choose to go short and place a sell trade on the DAX's future price movement.

Through your City Index spread betting account - where you can benefit from the tightest spreads including spreads from 1-point on major markets such as the DAX - you decide to place a sell trade at 6737.2 for a £10 stake.

Having a sell trade means that for every point that market falls, you will net a profit of £10 per point.

Following negative economic data out of Spain, the European markets - including the DAX - are affected and start to fall.

You watch the market closely, and as it reaches a value of 6686.2 you decide to cash in your profits by buying back at 6687.2.

As a result: The market had moved 50 points when you bought it back; therefore you net a tax-free* profit of £500, i.e. (6737.2-6687.2) x £10 = £500

However, had you waited to close out your trade and the DAX had bounced back to trade 50 points higher than your opening level, you would have lost £500.

Spread Betting with City Index

Spread betting provider City Index allows traders to benefit from access to a wide range of financial markets - including the German DAX and the French CAC 40 - 24-hours a day, across multiple professional trading platforms.

When trading the markets, it is imperative that investors remember that as a leveraged product, spread betting comes with high levels of risk. By learning how to manage risks through risk management tools, they could limit potential losses without capping their profit potential.

*Spread betting is exempt from UK stamp duty and Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.


About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, financial spread betting.