Spread Betting by Vince Stanzione

Thanks to internet dealing you can now open a US discount brokerage account and buy US-listed shares as easy as UK ones. Commissions are low – in most cases $8 to $9 per trade regardless of size – there is no stamp duty and in many cases the bid/offer spread is fairly tight, certainly compared with some UK-listed AIM stocks. Those looking for a bit more risk can also spread-bet many of the smaller US-listed stocks.

Of course, just like UK smaller companies US ones also carry a higher risk. However, by diversifying your holdings and not putting all your hard-earned money into one high-flying small-cap biotech stock, you reduce your risk.

Get into ETFs
Another way to get exposure to smaller companies with lower risk is buying an exchange-traded fund (ETF) that tracks the S&P 600 SmallCap Index. The best known is the iShares SmallCap 600 Index (NYSE:IJR), which has good liquidity, trading well over one million units a day, and some spread-betting companies will also let you bet on the price.

In the past two years the IJR is up a very respectable 32 per cent, beating its big brother, the S&P 500 (SPY), which is up only 18 per cent. The ETF, as per the underlying index, is made up of 600 shares, so a very broad spread of companies, and the annual expense is just 0.2 per cent. The top five holdings in the ETF are Regeneron Pharmaceuticals, Healthspring Inc, World Fuel Services, Signature Bank and Biomed Realty Trust.

The real action is in individual names, where we can see 100 per cent-plus moves, especially in technology- and biotech-related names in fairly short periods.  

Mobile App developed Glu Mobile (GLUU) is up over 300 per cent in the past two years, while Coffee Holdings Co (JVA) is up a staggering 400 per cent just this year, which gives you an idea of small-cap potential. Of course there are plenty of shockers as well, but if you’re buying a stock for $1 or $2 then at least the downside is known – the worst that can happen is the stock goes to zero.  

Remember, just because a share is trading at $1 doesn’t mean it’s cheap compared with, say, Apple trading at $390. You can also still have a small-cap that is trading at $50 such as Regeneron Pharmaceuticals (REGN) and you should look at the market capitalisation for a true picture of the size of the company.

You will also find that, compared with the UK market, even a small-cap in the US (where everything is bigger) can be in excess of $500 million.

Also, just to be clear, I only buy stocks if they have at least a Nasdaq or NYSE junior listing – no OTC or pink sheets as they are just too wild for me and attract penny-share-pushing operators who may be happy to sell you the stock but you can never sell it back!

I also stay away from Chinese reverse takeover stocks (RTO). I want to see that there are at least 100,000 shares traded per day, and I like to see that volume increasing with the share price moving higher.  

Chart hits
Charts are available at various websites, such as stockcharts.com, for free, and a good charting program like Sharescope will have small-cap US-listed shares. You can also filter the data – for example shares that have made new 20-day highs or those that have moved X per cent in the past 20 days, which can provide a starting list for further research.

Remember, we are seeking shares that look like they are starting to come to life. Many small-caps can do nothing for months or years. Coffee Holdings (JVA) is a good example – it stayed in a $5 range for about two years, then went from $5 to $30 this year before coming off a bit recently.  

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds. For more details visit www.fintrader.net