Imagine being able to predict how the stock market will behave on certain days of the year. It would be a licence to print money.
In fact it is not as far-fetched as it sounds, as we know that certain trading patterns have a habit of appearing year in, year out, and that certain months of the year are great times to be invested in the market. As 19th century American author Mark Twain once said: "History doesn't repeat itself, but it does rhyme." And rhyme it certainly does when you know the rhythm of the stock market in March.
There are fairly sound reasons, too, why these stock market trading patterns emerge. Academics have shown that changes in our mood can directly impact on our behaviour patterns, including how we make investment decisions ('Winter Blues: A SAD Stock Market Cycle', Mark Kamstra, Lisa Kramer and Levi, Federal Reserve Bank of Atlanta, October 2003). In turn, we can take advantage of the mood changes of investors, and their impact on the performance of the stock market, if we know when this is likely to occur.
Mechanics of trading the UK market
The FTSE All-Share consists of the blue-chip FTSE 100, mid-cap FTSE 250 and the FTSE Small Cap index. However, the FTSE 100 has a weighting of over 75 per cent in the FTSE
All-Share so the two indices track each other very closely. Most investors prefer to trade the UK market through the FTSE 100 instead of the FTSE All-Share as there are far more options for buying or selling short the index.
Spread betting is one method of trading where investors can place either an up-bet (to buy) or down-bet (to sell) for every point movement in the FTSE 100. Profits from spread betting are currently tax-free in the UK. This trade is simple to execute and you can place a bet for as little as £1 per point movement on the FTSE 100. In the UK, spread betting providers include Capital Spreads, Cantor Index, City Index, CMC Markets and IG Index.
Another way of buying the FTSE 100 is through an ETF that tracks the performance of the index with each 1 per cent movement in the index translating to a 1 per cent movement in the ETF. These include those issued by Lyxor (TIDM: L100), a subsidiary of French investment bank Société Générale, Deutsche Bank (TIDM: XUKX) and Barclays iShares (TIDM: ISF). ETFs can be bought or sold through stockbrokers in the same way as shares in any listed company.
Alternatively, structured product providers Société Générale (http://uk.warrants.com) and Royal Bank of Scotland (http://ukmarkets.rbs.com) offer a range of covered warrants, quantos and listed turbos on the FTSE 100.