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.
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
- 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.