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Spread betting | The Simple Way to Trade the UK Stock Market

Understanding Spreads and Contract Lengths

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If you’ve already read What Is Spread Betting?, then you probably already have a good understanding of what spread betting is. Before placing a spread bet, it’s important to understand contract lengths, and how these effect the spread you pay on your bet. Minimising your spreads means maximising your profits or minimising your losses (hopefully the former of the two). It’s through these spreads that spread betting firms make their money.

What Is A Spread?

A ‘spread’ is the difference beween the sell and the buy price of an instrument. You’ll see prices quotes such as ‘sell: 489.0 / buy: 497.0’. If you were to ‘buy’ into this bet, you’d be out of pocket until the ‘sell’ price were at or above the price for which you bought at. For this reason, the tighter the spread, the better. Some shares will attract a larger spread than others for various reasons, usually due to the volatility of said instrument.

Timing Of Your Bets

It’s worth mentioning that the time of day can effect the size of the spreads for any market, for both daily and quarterly bets. A prime example of this is early morning trading, when the London Stock Market opens at 8AM. Spreads at this time will usually be at their widest as trades placed over night are processed and markets adjust accordingly. In addition, as indicies such as the FTSE 100 trade 24 hours Monday – Friday, the spread on these will be larger during over night trading.

Different spread betting firms will offer different spreads, so shop around for the tightest spread. The smaller the spread, the less money you spend, and hopefully the quicker you’ll be in profit.

Contract Lengths

A contract length is the time for which your spread bet is valid. The type of contract will directly effect the spread you pay on your position, so it is important to choose the right one and understand when taking a more traditional approach to stock speculation might be more appropriate. Most spread betting firms will offer you one or more of the following contract lengths on a spread bet:

Daily – (Rolling Daily / Daily Funded Bets / Daily Cash Bet):

Daily bets (or varieties of) expire at the end of each day, but are typically automatically rolled over to the next day, giving them no real expiry date. Daily bets will most closely match the real underlying market and will offer the smallest spread of all the contract lengths. While the daily spread bet option has the smallest spread, you will be charged a small overnight financing charge (for quarterly bets, this is included in the larger spreads – see below). Depending on the anticipated length of your spread bet, the daily bet may be your better option, especially if you intend your bet to be open for a shorter time. Daily funded bets are not recommended for long term bets.

If you open and close your bet on the same day, no overnight financing fee will be charged.

Calculating Daily Financing:

Taking IG Index’s DFB (Daily Funded Bets) as an example, the interest charged each night is calculated at: D = (S x P x R) / 365

Where:

  • D = daily interest adjustment
  • S = size of bet
  • P = underlying index price at 10pm (London time)
  • R = applicable annual interest rate

In the case of IGIndex, the ‘applicable annual interest rate’ is set at the one month LIBOR for the given currency of your bet (in your case most likely GBP) + 2.5% for long positions, or -2.5% for short positions. Short positions are typically credited interest rate to their position, whereas long positions are debited. That said, with LIBOR at all time lows, shorting positions are typically subject to interest debiting also.

Long Position Example

We’ll take a £30 long position on Supergroup (SGP), quoted at 486.70. Given the current LIBOR at 0.76%, the applicable interest rate will be 3.26%, therefore, our daily interest can be calculated as: (£30 x 486.70 x 3.26%) / 365 = £1.31 debited.

Short Position Example

We’ll take the same example as above, but this time we’ll short Supergroup. (£30 x 486.70 x -1.74%) / 365 = 70p debited.

Quarterly – (3 Months, 6 Months, or 9 Months):

Quarterly bets are a contract for a future price on a given market. Quarterly contracts are not always offered on all markets, and different spread betting companies can offer different quarterly bets (3 months, 6 months, etc.).

Financing for future bets are priced in to the quote and so will typically have a larger spread and is least likely to reflect the real market price for your given market. It’s important to note that you are not obliged to maintain your spread bet for the duration of the contract and you can close your position anytime you wish.

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Comments

  1. Hello Simple Trader

    I have just found your website – it has some very well written and considered articles that I can relate to – keep it up.

    In terms of dealing spreads charged by spread betting companies, another thing to consider is whether you pay for a guaranteed stop which on shorter term bets can more than double the spread charged.

    For frequent traders who make numerous short term trades, it may not seem worth paying the extra spread charged for a guaranteed stop. The 2 or 3 points saved on each trade may seem to be the way to go and the strategy could prove beneficial over the short and medium term.

    However, it just takes one trade to be open the wrong side of a market crash for all of these years’ worth of savings to be wiped out in an instant.

    In my opinion it is a case of when, not if the markets will crash. There may not be any warning when this happens and spread betting companies may not be able to close positions at levels anything like the non guaranteed stops placed. When this happens, traders could potentially have their positions closed due to lack of margin 2,000 points away from their opening level.

    I have personally never opened a spread bet without a guaranteed stop. It is bad enough losing the money that I have funded my account with – I cannot risk the possibility of losing it and also potentially owing the spread betting company thousands of pounds. While it costs me in the short term, I believe that I am making a long term saving.

    I see that you always trade with a stop-loss but are these guaranteed ? In times of severe market turmoil, non guaranteed stops may be worthless.

    Thanks

    David

    Reply

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