Real trade No 2
For the Footsie trade, I was determined to finesse the timing of the trades so that I got into and out of the market at exactly the same time. I recruited two volunteers from the office and their computers. The three of us sat with fingers poised over the buy button. I prepared the covered warrant trade on my computer and the spread-bet and CFD trades on the other two machines.
• Underlying: FTSE 100 index
• Time period: two days
With the actual market flickering between 4781 and 4782, I gave the signal to buy. Comdirect gave me 10 seconds to accept or decline the price for the Footsie covered warrant. So it would have been nice to see the price of the underlying asset on the same trading screen - most private investors lack access to the real-time prices that we have in the Investors Chronicle office, so they may not know what the underlying market is doing.
Despite pressing the 'buy' button at exactly the same time and receiving instantaneous order confirmation for the spread-bet and the CFD, it turned out that I had bought at different levels: at 4782 for the IG spread-bet and at 4784 for the Interactive Investor/City Index CFD.
When I came to close the positions the next day, the same thing happened. I synchronised the closing trades down to the second. Yet the get-out price quoted to me by IG was, once again, better than for the CFD (while the market was quoting 4813, IG settled at 4813, whereas Interactive Investor quoted me 4810).
I telephoned Interactive to find out why. The reply - "that's where the market was" - failed to impress me, but at least it hammered home another important message: no matter what the pros and cons are on paper, the real service is only apparent once you see how the spread-bet, CFD or covered warrant trade in practice.
In this instance, the spread on the CFD was two points worse than the spread-bet on the opening trade, and three points worse on the closing trade. Those five points may not sound like much but, if you are betting £10 a point, that's a £50 difference straightaway. You cannot conclude that spread-bets are better than CFDs by comparing the IG spread-bet with the Interactive Investor CFD. However, it does suggest you should open several accounts with different companies to test which ones work best for you.
The only reason I made more money from the CFD trade overall was because I had staked £3 per point with a 67-point stop-loss instead of £2 per point on a 100-point stop-loss with the spread-bet. But that was just for demonstration purposes. I could have bet £3 per point with the spread-bet, which would have made me £91.50, compared with £75.47 on the CFD.
I was able to trade out of the covered warrant at 12.5p - a 13.6 per cent return on the warrant from a 0.7 per cent rise in the Footsie over little more than 24 hours. That return of £27.25 (less £2 commission) was lower than with the spread-bet or the CFD, but two things are worth noting.
First, the spread on the warrant was 0.1p and, given the parity of the Footsie warrant was 1,000, the effective spread on a Footsie trade was one index point. The spread for the spread-bet was two points, and four points for the CFD.
Second, had the markets swung against me, and the Footsie dropped by 100 points, I would have lost all the money from the spread-bet and CFD positions - but not with the Footsie call warrant. It would have had until 16 September 2005 to show a recovery. If, at any point inbetween, the Footsie were to have broken through the 5000 barrier - or even looked like doing so - I could have made some money.
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