Are there any charges which you will encounter if you begin spread betting? All too often, new traders fail to discover that there are several different charges until it is too late. Here, we look at the main costs which you will probably encounter once you start trading with a spread betting firm.
- Size Of The Spread
As we already noted, traders have to pay the spread cost on every spread bet. If they are to break even, the spread needs to be overcome by market movements in your chosen direction. Luckily, this charge is immediately transparent and clear, since it will be shown in the sell and buy price when you place the trade.
We also noted previously that a volatile market will usually cause the spread to increase, since the underlying security’s price can change rapidly, going up or down in a short period of time. Similarly, if you trade in futures, the further ahead you trade contract is due to expire, the wider its spread can be since the asset’s price has a larger scope to move over a longer time period and providers must necessarily protect themselves from large movements in the market.
Different providers will offer different spread sizes, however you may find more competitive prices among larger brokers.
Most companies which offer spread betting use their prices to persuade new clients to register for their services, using the most popular markets when advertising their services and on their sites. However, in cases where spreads are smaller, it is possible the overnight charge or margin requirement could be higher. They may also be a minimum limit placed on the capital spend allowed per trade. Check out these numbers before opening an account.
A margin refers to how much capital is required for opening a position. It is defined by a margin rate. The margin rate will depend on which security you choose for spread betting – usually, if the bet is risky, the margin will be higher in order to cover the extra risk.
- Rolling Daily Rate
This is probably the largest cost you are likely to encounter. There are two primary ways of spread betting:
- Entering into a rolling daily contract
- Opening a futures contract
A rolling daily contract may be indefinitely kept open. While they do expire eventually, it will only be after several years. A futures contract, on the other hand, has a set expiry date, although you can close it out before it expires. If you trade using a rolling daily contract, a charge is applied for every night that the trade remains open and this is the “rolling daily rate”. It usually appears as a debit or credit on your account with your provider debiting the amount of you have entered a “buy” or crediting you if you made a “sell” trade.
This cost has been put in place since you are, for all intents and purposes, borrowing your provider’s money since you are trading on leverage.
When it comes to futures trading, there is no rolling daily rate applied, however there is usually a wider spread instead because of the extra costs which the provider has to cover to keep the position open.
When we look at the rolling daily rate, it is composed of the provider’s standard charge as well as a one month interbank funding rate such as LIBOR. Below, we look at charges incurred if the broker applies a 2.5% daily rolling rate.
Interbank Rate + Broker Charge of 2.5%
Interbank Rate + Broker Charge of 2.5%
If the Interbank rate is over 2.5%, the trader’s account is credited
If the Interbank rate is less than 2.5%, the trader’s account is debited
Hopefully, you have a better understanding now of the various costs associated with trying out spread betting.
Does The Rolling Daily Rate Differ Between Different Providers?
The short answer is yes. Every broker will have slight differences in their policy regarding rolling daily contracts. While some will assign losses or profits each day that the contract rolls over, others only credit or debit the account after the trade has been manually closed.
This information will be provided in the user guide from your provider, how it should be displayed clearly on your trade as well as on your contract note on opening your trade. Always read all of the small print as you will find important information about the margins here too.
Note, however, that Forex position do not have a rolling daily rate applied since they are financed through the tom-next rate.
- Trading Forex
The term “tom-next” refers to “tomorrow next day”. Sometimes, it is called the cost of carry. In the same way as trading futures, a Forex trade could end up with the trader having to accept the delivery of their traded asset should they fail to close out on their contract before it expires. When you trade in Forex, note that the date of delivery is 2 days following the transaction, however the majority of Forex traders are purely speculators who never intend to take delivery of the currency they have chosen.
If you want to keep your Forex trade open overnight, brokers will use the daily close rate when closing the position then re-enter the position when the next day’s trading begins. Any price difference seen between the two contracts is the “tom next adjustment”, enabling investors to hold a long-term position with no need to worry that they will face delivery of their currency. It goes without saying that if decide to open then close out the position within the day there will be no tom-next charge applied.
- Keep Moving
When a trader doesn’t place a trade or doesn’t maintain a cash position open on their account for more than 12 months, an inactivity is sometimes applied by the broker every month. The amount will differ between brokers, so you should check this out before you open an account.
Also in our ultimate guide to spread betting, it covers:
- Ten Good Reasons To Try Spread Betting
- The Potential Risks
- Making A First Trade
- Positive Thinking – Going Long
- Going Short – Winning A Trade From A Falling Market
- 5 Ways To Make A Profit From The Market
- Choosing The Right Provider Of Spread Betting Services
- Glossary Of Spread Betting Terms
- Compare spread betting brokers, features, accounts and markets