The Daily Long 5 and Daily Short 5 are derivatives that trade on the London Stock Exchange. They are based on the performance of the FTSE 100 including reinvested dividends, or FTSE 100 TR index. If you think that index will close higher today than it did yesterday, you buy the Daily Long 5. And, if you think it will close lower, you buy the Daily Short 5.
FTSE & FTSE TR compared
Here's a quick example of this. Say the FTSE 100 TR index closed at 4000 last night. You reckon it will rise today, so you buy a Daily Long 5 at the open. The index rises 40 points or 1 per cent. Your gross return from this 1 per cent increase, however, is 5 per cent. The same would apply had you bought the Daily Short 5 and the market had then fallen 1 per cent.
Of course, the leverage of these two products cuts both ways. Let's say you bought the Daily Long 5 expecting the FTSE TR to rise, but it ended up falling 1 per cent on the day. That 1 per cent decline in the index becomes a 5 per cent loss on the value of your Daily Long 5 - and that's before costs.
Although you can hold a Daily Leverage product for more than one day, they are not designed for that purpose. First of all, they won't necessarily give you the returns you might expect over periods of more than a day, because of the effects of compounding. For example, the index could be totally flat after a few days, but you end up with a loss on your Daily Long 5.
Because they trade on the London Stock Exchange, you can deal in Daily Leverage products through a normal stockbroking account. For this you would pay standard brokers' commission when buying and selling. As with almost any other traded product, you pay a higher price when buying and receive a lower price when selling one of these instruments.
There are also additional costs if you hang on to a Daily Long or Short for more than a day. You pay a 0.0013 per cent charge for each additional day held, as well as a daily 'insurance' premium to protect you from being wiped out by a frankly highly-unlikely massive move in the index from one day to the next.
If you want to speculate on the direction of the FTSE for more than one day, therefore, you are better off with a spread bet or contract for difference (CFD). Or if you prefer not to run the risk of larger losses than the move in the market, an unleveraged exchange traded fund is likely to be better for you.
Daily Leverage products might be an especially suitable tool for you if you're into systematic trading strategies, where you work out your odds of success based on past price moves or seasonal factors.
