The Dangers and Rewards of Spread Betting on Bid Rumours

LONDON, January 16, 2012 /PRNewswire/ --

Bid rumours could provide rewarding insights into the future movements of share prices for spread bettors. However, spread betting on bid rumours can be quite dangerous too, with share prices tending to be highly volatile both to the upside, when bid rumours emerge, and to the downside, should the rumoured parties quash the speculation by issuing denials.

Bid rumours historically trigger sharp rises in the share prices of companies that are the subject of speculation, as offer values normally give existing shareholders a hefty premium on their shares.

For example, if the share price is currently 300p, the bidding firm may have to offer 400p to secure a successful takeover, giving existing shareholders a 100p or a 33% premium on their current holdings.

This can increase share price demand and push up the share price value, so if spread bettors can get in early on bid speculation related trade opportunities, it can be quite a lucrative trade.

Recently, fresh speculation of a takeover bid for Gulf Keystone Petroleum saw the Kurdistan focused oil and gas explorer's shares soar from 198.50p on the 8th January 2012 to a record high of 350p on the 12th January 2012. A rise of 76% in value in just four trading days based on rumours.

A report in The Telegraph also said that Gulf Keystone was forced to deny a report that US oil giant ExxonMobil had been preparing an 800p-a-share offer. The consensus of the article was that it would be a matter of time before Gulf Keystone would sell up. Gulf Keystone declined to comment.

Placing spread bets on bid rumours is not without its dangers, because share prices tend to be highly volatile to the upside when bid rumours emerge, but can become volatile to the downside when the rumoured parties quash the speculation by issuing denials or in some cases do not issue a statement at all, creating uncertainty.

Gulf Keystone Petroleum shares retraced from the 350p high on the 12th January 2012 to close on the same day at a price of 276.25p, as traders locked in their gains in case no definitive bid emerged.

Likely, this was because Gulf Keystone had declined to comment on the bid rumours, leading to uncertainty. So it can be crucial to protect any losses in case volatility turns against your positions by using guaranteed stop losses.

Using bid rumours to plan your spread betting can be dangerous but also lucrative, which is why stop losses and even guaranteed stop losses can protect your trades in case the market fluctuates against your expectations. Meanwhile, limit orders can be used to lock in profits before share prices move again.

To learn more about spread betting as an alternative form of trading visit: http://www.cityindex.co.uk/spread-betting/

Financial spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month in over 50 countries. We provide access to a wide range of instruments including margined foreign exchange, CFDs and, in the UK, spread betting.

We constantly look to improve the performance of our platforms and expand our range of services. The result is our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support. Visit http://www.cityindex.co.uk/ for details.

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SOURCE City Index