You can now hedge against losses on more than just shares - spread bets can protect you from falling house prices, rising business costs - or guarantee a salary bonus payment
Hedge your Isa
Imagine you have a FTSE 100 tracker fund, protected from tax in a £7,000 individual savings account (Isa) wrapper. If you fear an imminent fall in the FTSE, and want to protect your capital without the hassle and cost of exiting your Isa, you can hedge your exposure with a spread bet.
Say the index is trading at 4,404. You simply divide the £7,000 value of your Isa by 4,404, which gives you a figure of £1.60 per point. You can then go short on a spread bet by £1.60 a point. If the FTSE does fall - let's say, by 9 per cent to 4,004 - you will make £630, which should be the same as the amount you have lost on the FTSE tracker. You can make money from short-term fluctuations, while keeping your capital within an Isa.
Make money from falling house prices without selling up
Some readers of Investors Chronicle are so convinced that there is a house price bubble in the UK that they have sold their properties and started to rent. But there is an easier way to make money from falling prices - without the inconvenience of estate agents' fees, moving costs and rents. IG Index offers spread bets on monthly changes in UK house prices. Cantor Index also offers house price spread bets until June this year.
Exploit differences in regional house prices
IG Index also offers quarterly contracts on the Halifax's regional house price surveys of average selling prices. If you think that the north of England will play catch up with the south, or that prices in the south should be higher still, then you can go long of one region and short of the other. The 12 regions are: East Anglia, East Midlands, London, North, North West, Northern Ireland, Scotland, South East, South West, Wales, West Midlands, and Yorkshire/Humberside.
Get a foot on the property ladder
If you can't afford the house you want, but are worried that prices will keep rising, you can take out a spread bet that will pay out if prices do indeed go up. If they fall, you will be worse off, but you will be more able to afford the house you wanted.
Limit your exposure to house prices
Imagine you have just bought a new house, and are waiting to sell your old house. If you're lucky, house prices will keep rising as you wait for a buyer. But if you don't want to take the risk of a downturn, you can use spread bets to short the housing market. If you do have to lower your asking price to shift the property, at least your spread bet should come good (assuming that your house moves in the same direction and to the same extent as average house prices).
Insure yourself when buying off-plan
Buying properties before they are even built (buying off-plan) is being encouraged by property developers who are looking for easy ways to finance new projects. It is particularly common in the buy-to-let market. However, buying off-plan exposes you to the risk that prices will suffer a nasty drop after you sign the contract, but before the build is complete. House price spread bets would let you insure against that risk.
Keep a cap on your wage bill
If you run a small business, wage bills are probably a substantial part of your costs. And one of the key drivers behind salary inflation is probably your staff's desire to move up the property ladder. If you take out spread bets on rising house prices, and the market keeps soaring, you can choose how to spend your profits: meet your staff's wage demands or employ a recruitment consultant.
Hedge your exposure to oil prices
If you work in the transport sector - say, you're a taxi driver or run a road haulage business - petrol will be a big part of your costs. If you are really worried about higher petrol prices, shorting the price of oil may be a more effective way to protect yourself than lobbying your MP or blockading a bridge with tractors. Just remember that the link between oil and petrol is far from perfect (fuel tax gets in the way, and oil companies smooth out the big fluctuations).
Hedge your jewellery costs
Imagine that a jeweller who crafts objects out of gold, silver or platinum has an overflowing order book. If she wants to lock in the profit margin of those orders, she will have to control raw material costs. But she won't want to buy too much metal too far in advance. A precious metal spread bet allows her to cap raw material costs, and guarantee that the jewellry will sell at a profit.
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Play off utilities against interest rates
Most utility companies have good dividends (compared to current interest rates), but precious little else to offer investors. When interest rates rise, the utility sector normally comes under pressure. In a perfect market, that possibility should already be priced into shares. If you don't think it is, you can short the sector, and bet on a rise in Bank of England base rates up to several months out.
Hedge your corporate bonds by shorting the underlying stock
If you own high-yielding corporate bonds, and you are worried that the company may not be able to keep paying, you can hedge part of the risk by shorting the company's shares using spread bets.
Guarantee the value of your bonus
Many City workers receive their annual bonuses in dollars (some of them once got paid in Turkish Lira, but that's a separate story). If you don't want the value of your bonus wiped out by panicky foreign exchange traders, short the dollar, and insure yourself against the risk of falls in the greenback.
Bet against your company
If you work in the private sector, your salary, your pension, your ability to keep up mortgage repayments, any bonus scheme and any share options will all, ultimately, depend on the continued good health of one company. That's a lot of eggs in one basket. By betting against your company, you can hedge some of this risk.
Make a farmer happy
The whole derivatives market began as a way to shield farmers from the risk of booms and busts in commodity prices. Even a small UK farmer may find it worth his while to hedge against a fall in crop prices. You can spread bet on the prices of London wheat (Finspreads) and US oats, corn, rice, soya and even pork bellies. The next time a farmer complains about falling prices, make his day by pointing this out.
Take back control of your company pension
If your company pension is run by a fund manager who'd rather be wrong with the crowd than risk being the only one right - and let's face it, whose isn't? - then spread betting can help set you free. Opting out of the company pension may be uneconomic, or downright impossible. So find out where your fund manager has invested your life savings, and if you don't agree with the decisions, short the shares and sectors that he or she has bought.
Hedge your self-invested personal pension
If you have a self-invested personal pension (Sipp), you'll know that, over time, dealing costs can make a nasty dent in your pension pot. But if you want to trade the shares more frequently, then spread betting will let you make money from short-term falls, without selling the underlying shares.
Insure against rising mortgage payments
There are many good ways to protect yourself against rising mortgage repayments - fixed-rate mortgages, capped mortgages, specific mortgage insurance, and not buying over-priced shoe-boxes in the first place. To do it through spread bets, take out a short position on short-dated UK treasury bonds (short sterling). That way, if interest rates rise more than expected, you will make money that you can use to offset higher mortgage repayments.
