How To Get Started Spread Betting
Maybe you've been dreaming of starting trading. Or maybe you're already a trader but want to gain wider access to the markets.
Whether you're a complete newcomer to trading, or whether you're an experienced professional, anybody can benefit from all of the advantages offered by spread betting as long as they put in the dedication, hard work and time. The good news is that you are already reading this, so you're ready to make the commitment.
In this useful guide (where you can also compare the best spread betting brokers), you will find out all about the spread betting basics. We will explain the way in which it works and some of the terms you'll come across. You will also find out more about the type of securities that can be traded and the extra costs you should be aware of and especially the risks of trading.
Spread betting is the name given to a kind of trading that enables investors to speculate without having to own the assets. While, conventionally, a trader can profit only if the market increases in value, spread betting can turn the idea upside down: Depending on the way in which you position a trade, it is possible to profit from either an increase or a decrease in the market.
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Why Trade the Markets with Financial Spread Betting?
What are the reasons for the popularity of spread betting trading? There are many reasons why people embark on spread betting, however, of course, the main reason is to try and make money. Many of the advantages are extremely lucrative:
- Spread betting offers investors the possibility of making a lot of money (but there is an equal amount of risk).
- Profits made from spread betting are not subject to tax in the United Kingdom (at the moment)
- Investors can gain access to worldwide financial market trading
- Trading can be intellectually challenging and exciting
- Only a small relative amount of money is required if you try spread betting to open your trade
- Spread betting is available 24 hours a day (even some markets on the weekends)
- It is possible to profit even from a falling market, by going short
- Spread betting can help you hedge your longer term growth investments
- It enables a more diverse investment portfolio
- Trading can easily be done from smartphones or tablets on the move thanks to many mobile apps which are available from the top brokers
Let's look more closely at these many advantages to find out why so many people are attracted to spread betting.
Profits Free From Tax
Perhaps the greatest benefit of spread betting is that all profits are free from tax in the UK, with spread bettors being exempt from stamp duty and capital gains tax. The reason for this is because it is considered to be a derivatives product – investors do not buy a security, instead the bet on what its future price will be. This makes a huge difference to your potential profits.
How Are My Profits Affected By Tax Exemption?
If you try spread betting, it's possible to earn an additional 28% or 18% return on any profits. Capital gains tax stands at either 28% or 18% (depending on your tax rate) on your profit if you sell your shares. Not only this, but stamp duty (a tax of 0.5% currently) is usually applied to share purchases in the UK, but spread betting is exempt from this. For both of these reasons, spread betting is a more profitable choice than stock broking, for example, where the underlying security is purchased.
Trade More, Pay Less
Tax savings are not the only reason to try spread betting. Another advantage is that it is leveraged, and therefore only a small amount of the security's price needs to be deposited in order to speculate. If, for example, you tried spread betting using a margin or leverage of 10%, the initial cost of the trade is just £500. This compares very favourably with stockbroking, where £5000 must be paid out to open a trade for £5000 of shares. This means you need a lot less money up front if you want to spread bet and this opens up wider access to the markets.
So, if you spread bet with a 10% margin, who pays for the remaining 90%? The answer lies with the provider of the spread betting services who, effectively, covers the trader. The size of the margin will differ between different markets and providers, with lower margins generally being offered on more popular markets. You should note, however, that while leverage often is celebrated as a top feature of spread betting, it also magnifies the risk as it becomes possible to lose more money than you used to open your trade.
Profiting While Others Lose
Good news often causes the price of security to rise, however negative reports often lead to rapid panic selling, which results in the price dropping. Spread betting offers the possibility of short selling, allowing you to make a profit by betting on a fall in the market's value. This offers the great advantage of potential for big returns.
So, how does short selling work? Short selling involves selling the security before buying it again once the price has dropped. If you're asking how it's possible to sell shares you don't actually own, the answer is that your broker is lending the share to you when you are short selling, so those shares are sold immediately on the markets. Once the market has fallen, you then can purchase back an identical amount of the same shares, giving them back to your lender so you can settle your debt. You will then profit from any difference in price between the original selling price of the asset and the cost you incurred in purchasing it back.
For example, if the Lloyds Banking Group currently trades with a value of £73 for each share and you have reason to believe those shares will fall soon, you can short sell a thousands shares in the company for £73,000. Soon after, you were proved correct when disappointing results in the release of Lloyd's half-year profits cause the price of shares to drop to £72.50. This means you can purchase a thousand shares in the company for £72,500. The shares are then returned to your lender who will accept the amount of shares that they lent out, regardless of the value which has decreased. You will make the profit of the amount of difference between the selling price of the share at the beginning of your trade and the price that you paid in buying them back. In this case, £500.
While short selling can offer its own advantages, theoretically, the price of a security can continuing increasing with no limits. This is different to buying securities outright, where market prices are limited to dropping down to zero and no further. Due to this, you need to implement guaranteed stops, or stop losses, on short positions.
Why Do Investors Short Sell?
The reasons for short selling are two-fold. Some traders just have a feeling that a particular market is going to fall, whereas others short sell as a way of hedging their risk.
Short Selling The Dax – The Winning Trade
Back in the January of 2000, one wise investor carried out research and decided that there was likely to be a drop in the Dax level. So he made the decision to sell at 6955, beginning at first with only a small stake but increasing his position size as his confidence grew. Over the course of 18 months, his predictions proved to be right, with the trader closing his position with a £1.1 million profit at 3550.
While shorting may be profitable and you don't need to be limited to just a single side of the markets, only begin shorting after you have familiarised yourself with trading and are experienced in its risks.
What Can You Trade?
Whether you decide to bet on a fall or a rise in the market, spread betting offers the potential of trading on literally thousands of different markets. Depending on which provider you choose and the various markets on offer from them, you may be able to speculate on:
- Interest rates
- Foreign Exchange
Not only can you choose to speculate on numerous markets, you can also trade 24/7 if you choose. This means it's possible to benefit from events which take place out of the market's standard trading times, when other investors miss out. Oil is one market which offers a clear example of this. Saudi Arabia has considerable influence over the oil market, and any decision which is made out of standard trading hours would result in a sudden fluctuation overnight.
Three golden rules to profitable day trading with spread betting
The objective of day trading is very different from investing. Investing refers to a long-term investment in an asset class and should be determined by fundamental analysis and global economic climates. Day trading on the other had has nothing to do with a company's financial standing, their long term growth prospects and even less to do with what the global economy is doing as a whole.
The only thing that matters in day trading is market timing. This being the entry and exit points of your trades and how you view the market to determine them. Other than actually calling the market right the two other factors that will determine if your spread betting can make you money day trading are diversification and risk management.
Market timing - follow the trend...
This simply means don't fight the market. The key to picking winning trades when day trading is to go with the flow and piggy back on to momentum and get out when the moment is right.
It is very difficult to automate intra-day trading signals because there are so many variables that are not that relevant in longer-term position taking. So it's best to eye ball the day one minute and tick charts of your preferred markets. Stick to the most liquid such as the major FX pairs, the main indices and to some extent the top traded main market stocks. Investors Intelligence and ChartsTA.com provide some good education material and daily analysis.
For example, a zig zaggy chart will be difficult to predict the next move, but, a chart with a clear intra-day downtrend may continue to go down. Unless you are a reversion expert (and there are very few) concentrating on finding a trend is a good rule to follow.
Diversification - a basic premise for trading
The best traders in the world only get it right about half the time, most traders admit to being right about 55% of the time. But what makes the right trades right is that there are enough of them to run the wins and cut the losses. Traders need to look at as many trends and momentum charts as possible. A good diversified set of open positions against asset classes such as commodities, fx, indices and stocks should provide a bit of protection against economic indicators and external factors influencing price.
Once the positions (say ten or so) are open you should be able to tell in your open profit and loss section what traders are winning and what trades are loosing. When you call a trend correct run it, when you have called it wrong cut it. The skill is in closing positions, not opening them. A profitable position can go on to generate far more profits than ten small losses.
Risk management - using stops and limits.
As above one of the greatest demises of any trader is not cutting a loss. Traders live in hope that they will eventually be proved right and it is essential that realism is exercised. Traders get it wrong and using stops to automatically cut a bad position takes the emotion out of the game. Set yourself an amount you are prepared to lose on each trade and stick to it.
You can read more on what brokers offer guaranteed stop losses here.
The Potential Risks Of Spread Betting
You should know that if you choose to spread bet online, it's possible for your losses to exceed your deposit. This phrase appears often on the websites of brokers, but what precisely does that mean?
Trading providers are obliged by regulatory requirements to outline someone on their website that traders could potential lose more money when they spread bet than they put down as a deposit when they opened the trade. This is one primary difference between stockbroking and spread betting.
Take stockbroking, for example. If you purchased shares worth £1000 and then the market crashed so the shares were worthless, all of the money (£1000) would be lost but no more than that. However, in the case of spread betting, if you put down £1000 but the market moved against you, you could not only lose £1000 but if you didn't have the right risk management in place, you could potentially lose thousands more.
How is this possible? There's no need to worry. We will let you know how to avoid this happening in our “Controlling Your Risk” section of our Spread betting brokers website. It will explain everything you need to know about how risk management and leverage works, letting you know how to lock in profits and curtail losses.
As spread betting represents a greater risk than trade in funds, bonds and shares, it is recommended that spread betting is used only as a part of your investment overall strategy so you can lower your trading risks as a whole.
Making Your First Spread Betting Trade
Up to now, we have looked at the risks and benefits of trying spread betting platforms. Now we're going to look at how it works and how you can begin to place your first trade.
Just as a recap, spread betting is a speculation on whether a security's price is going to fall or rise. Once you've chosen which security you want to spread bet on, you will be given a quote from your provider. This comprises a “sell” price and a “buy” price.
As an example, if your provider offers shares in Vodafone at a price of 205/206, the left value is its sell price and the right value is its buy price. Should you believe the market will rise, you “go long” or bet on “buy”. On the other hand, if you believe the market is going to fall, you “go short”, or place a bet on “sell”.
After deciding which position you are going to take on your chosen market, you then need to choose how much you are going to commit to the trade per point of movement in the market. A pip, or point, is the measurement of the security's price movement, with its value depending on the security type. In the case of equities, for example, one point tends to equate to 1p, however with indices, usually 1 point equals one point in the index value.
After placing the bet, you simply watch the markets to see whether they will go up or down. The further it goes in the direction you selected, the more money you will make from the trade.
However, if your trade is going to make a profit, you have to overcome the security's spread – a part of the cost required to open a trade. Find out more...
What Is A Spread?
The spread refers to the difference which exists between a security's buy price and sell price. Typically, most providers will add a margin over the usual sell and buy market prices to create the spread. E.g. a share which is price to sell at 100p and to buy at 102p on the market may well sell at 98p and buy at 104p via your provider.
If you are going to make a profit when spread betting, you have to overcome your spread's cost before you break even. If, for example, your provider offered Vodafone shares with a 204/206 spread and you went long, with a bet of £10 for every market movement point, you would need to wait until the selling price had increased by 3 points up to 207 so you could make a profit of £10, or increased by 2 points so you could break even.
Which Factors Determine Spread Width?
There are two key factors which affect a spread's size – volatility and liquidity.
- Liquidity – this term is referring to the security's volume of trading every day. E.g. some securities trade constantly, however others only trade a couple of times daily. Securities which trade in big quantities and frequently will usually have a narrow bid-ask spread. This is because when securities have low trading volumes, the fewer traders they attract. This, in turn, means that brokers struggle to find buyers or sellers for it and therefore they require a larger amount of compensation to handle the transaction resulting in a quote for a bigger spread.
- Volatility – this refers to the risk or uncertainty in the market's movement size and refers to times of dramatic falls or rises in the markets. If the market is volatile, e.g. when sensitive economic data is revealed, spread often widen as participants are reluctant to enter trades while the price is shifting rapidly.
Therefore, if the security is popular and the market is volatile, the spread will be tighter.
“Wide spreads mean the market has to go further in your chosen direction for the trader to make a profit and therefore a narrow spread is best.”
Going Long With Financial Spread Betting
Let's imagine that you've been looking into Microsoft as a potential spread bet trading. Early reviews that you've seen about its most recent operating system suggest that the share price which you have seen quoted at £52 on the TV news is likely to go up. You've made the decision to go to your broker's website to place your trade in one of your spread bet accounts.
A Successful Trade On Microsoft – Going Long
You'll notice straight away there are 2 prices for Microsoft – 5202 is the price to “sell” and 5198 is the price to “buy”.
You make the choice to purchase at 5202 for £10 a point (1 point = 1p). That means for each point that the market goes up, you gain £10. You are proved to be correct in your prediction. Microsoft's new operating system does well and over the following weeks there is a rise in the Microsoft buy price up to 5306 and in its sell price to 5302. You want to take your profits and therefore you choose to sell your shares at 5302.
As your bet was £10 for each point, you have made a profit of £10x100=£1000
How To Make Money Financial Spread Betting
Depending on which spread betting company you choose, it's possible to speculate on thousands of different markets such as commodities, forex, shares, bonds, interest rates and indices. Here, we look at what is involved in trading these various markets.
- Indices Trading
When people refer to “the markets”, usually it is an index they are referring to. Indices measure the changes observed in a particular selection of stocks which represent a specific market (or part of it). If you trade indices, you can speculate on the overall market's performance and due to this, usually indices reflect the sentiment of investors about a certain region, sector or economy's state.
If traders trade indices, they can develop a more diverse portfolio, profiting from either the contraction or growth of a number of industries worldwide. Even better, taking a broad view of several companies may also service to reduce the risks associated with trading separate individual shares.
Some of the most popular indices for trading include:
- The New York Stock Exchange
- The S&P 500 (made up of the USA's 500 biggest companies)
- The Dow Jones Industrial Average (made up of the USA's 30 most influenced and largest companies)
- The NASDAQ Composite Index (an exchange focused on technology)
- Nikkei 225
- FTSE 100
Although some investors like speculating on the stock market, others prefer the Forex (foreign exchange) market which allows for 24/5 trading and a higher liquidity. Let's look at Forex trading next.
- Forex Trading
The Forex global market is the biggest financial market in the world, with up to $4 trillion of trades being placed each day. Forex trading refers to trading currency pairs to speculate which will go up in value when compared to the other. Open 24 hours, 5 days per week, the global Forex Market is very liquid and offers potential to achieve huge profits.
How do traders begin trading Forex? Firstly, it's important to get to grips with the technical terms which are used.
- Currencies are always traded in pairs. The base currency is the first of the pair and the second is the quote or counter currency.
- Every Forex quote has two parts – the bid and the ask price. The term “bid” refers to the price which the broker will buy the base currency for in return for the chosen counter currency. The term “ask” refers to the price which the broker will sell the chosen base currency for in return for the chosen counter currency.
- The term “spread” refers to the difference between the ask and the bid and this determines the position's cost to open.
- A major currency pair will be usually quoted to 4 decimal places. A pip or point is the final digit of this quote, so, if you were looking for a quote on EUR/USD and the bid price was 1.0661 and the ask price was 1.0664, there would be a spread of 3 pips. This cost must be redeemed from the traders' profits and therefore the market must move favourably in order to just break even.
Are All Brokers The Same?
When you trade shares, the price is fixed, however this is not the case when trading currency pairs. Currency quotes will differ between the various brokers and banks. The reason for this is that Forex is an OTC (over the counter) market, with no physical point of central exchange. Therefore, it is not as regulated as the stock market. This allows brokers to offer an identical currency pair to two clients at a completely different price. Since there can be variations in bid-ask spreads between providers, you need to take the time to compare brokers before you commit to the one which offers you the optimal spreads to suit your trades.
Great For Those Who Prefer Late Nights
Forex trading enables investors to trade 24 hours a day, 5 days per week as there is no centralized physical exchange to have set closing hours. That means that when you are told the US$ closed at a certain rate, that rate refers to the time at which the New York stock market closed, but spread bettors and traders are still able to trade in Forex after the stock markets close, which is very difficult to trading shares.
If you've decided you want to trade in Forex, you need to be aware of the various terms which are used in this form of trading.
For example, if you trade a currency pair, one currency is long and the other is short. This means if you're selling 100,000 units (standard lot) of EUR/USD, you are exchanging Euros (EUR) for Dollars (USD). The dollars are “long” and the Euros are “short” in this scenario.
It often helps when you think of some exchanges that you carry out every day. Imagine you have purchased 4 apples for £1 in a supermarket, you are then short £1, but long 4 apples. This principle also works when applied to Forex although there is no physical exchange.
Shorting The Euro Versus The US Dollar – A Case Study
The EUR/USD pairing is an especially popular currency pair among traders. Back in 2010, one trader made the decision to short their EUR/USD at the price of £1 per point. This means that his expectation was the Euro was going to drop in value. His bet was opened at $1.3780 but after he kept a close eye on the activity in the market and followed economic and political news around the world, he took the decision that he would close the trade in December at $1.3160.
Profit = (1.3780-1.3160) x £1 = £620
In this scenario, the trader profited by £620 – not at all bad in just a few months!
Which Currencies Am I Able To Trade?
Some of the world's most popular currency pairs for trading include:
The above pairs together with their various combinations represent more than 95% of all speculative Forex trades. However, the major currency pairs are sold and purchased in huge volumes so their volatility is relatively low. This means that, depending on the strategy you choose to trade with, it will usually take longer to make a profit.
Why Is Volatility Important?
Many traders prefer trading in a more volatile market since there are usually greater price movements in any particular timeframe. This makes speculation more exciting. Should you want to try spread betting in more volatile conditions in an attempt to increase your profits, you may prefer exotic currency pairs, however you need to take the time to review different providers before you open an account since usually only the biggest providers offer a decent selection of exotic currency pairs.
Not Just Any Pair
When it comes to trading exotic currency pairs, here is some important information.
Exotic pairs comprise a major currency which is paired with a currency from a smaller or emerging economy. The spreads on these currencies generally are quite narrow since they are sold and bough in large volumes. Singapore and Hong Kong's currencies as well as those from European nations from out of the Eurozone, currencies from other areas within Asia, Africa, the Middle East and Africa are all considered to be exotics.
As the financial, economic and political environment for these emerging and smaller economies change rapidly, this can affect their currency values significantly. The result is that exotic pairs usually make larger and faster moves which makes Forex trading more fast paced and exciting. As it also represents a 24-hour trading opportunity, exotic currencies are also appealing to traders who want to respond immediately to any urgent or relevant news. In areas where currencies are greatly affected by financial and political events, there is a strong influence on the commodities market by supply and demand. Next, we look at commodities, and why they are so interesting to traders.
- Commodities Trading
A commodity is a tradable raw material or a primary agricultural product. The commodities which are most commonly traded include precious metals like gold and silver, agricultural products like beef, sugar, coffee, barley, gas and oil.
There are several ways of classifying commodities. A soft commodity is one which is bred or grown (like oats or cattle) while a hard commodity is one which is extracted such as aluminium or copper. Sometimes, commodities are classified in categories of:
- Energy – gasoline, heating oil, natural gas and oil
- Metals – aluminium, platinum, copper, gold and silver
- Agriculture – sugar, wheat, rice, cocoa and coffee
- Livestock and Meat – feeder and live cattle
Usually, commodity trades are carried out via futures contracts on an exchange which standardises the minimum quality and quantity of the communities being traded. As a future is a contract to sell or buy the asset, should the trader fail to close their position before it expires, a large delivery of a commodity that the trader neither wants or needs could end up being the result.
When you're a spread bettor, however, you won't need to worry about this eventuality. You are just speculating on the asset's movement, not actually purchasing the future. Your provider, however, will always ensure that the situation never occurs by closing the trade before it expires.
Typically, the commodity market follows supply & demand, with lower supply leading to a higher price. The price of commodities can be affected by numerous elements including weather patterns, advances in technology, wars, health epidemics and developments in the global economy.
Before investing in a commodity, ask yourself the following questions:
- Which country has the biggest supply of this commodity?
- Which countries or sectors are the commodity's major consumers?
- Is that country stable politically? Is it especially vulnerable to turmoil?
- How much of the commodity is produced ever year/quarter/month/day?
- What are the main uses of the commodity?
- Does it have an alternative which could have an effect on its value?
- Could it be affected by any seasonal factors?
Safe Haven Investment
Investors use some commodities as a safe haven investment – a security which retains its value even when the market is very volatile. A lot of traders try to reduce risks if the markets are turbulent by choosing to invest in a safe haven security.
One key example is gold. Gold is often believed to be one of the safest investments since it generally retains value even if there is a stock market crash. Typically, gold's prices actually rise if interest rates or share prices fall as investors seek it out as a shelter in a tough time.
But what about shares? What do you need to know about spread betting and shares? Read on to find out.
- Share Trading
A share is a piece of a company ownership which may be purchased and sold via financial stock markets such as the New York or London stock exchanges. The value of shares is determined by supply & demand, and this can be primarily affected by the performance (or the perceived performance) of the company by its investors. If the company, for example, reports to its investors that they have had an especially successful quarter, their share prices usually rise. But if the same company issues profit warnings, or is implicated as being involved in some kind of scandal, it's likely their share price will fall.
As every share belongs to one specific company instead of being focused on the economic status of a country or whole industry (as is the case if you choose to spread bet on Forex or indices), when you trade shares it's possible to research in a more focused way about the company which you believe will increase its value.
Spread betting will give traders the ability to trade on many thousands of different shares across a variety of shares markets around the globe. You can source information and carry out research at News.Markets which provides plenty of useful information, as well as on the Citywire and BBC Market Data pages. Reuters is one further useful site that offers traders the most up to date investing and financial news together with stock quotes and data on a broad spectrum of businesses.
A Successful Trade – Go Long On Google
Back in 2004, Google was floated on the stock market, with its shares selling for $85 each. Quickly, however, those shares increased in price. One amateur trader decided to benefit from this and opened their trade, buying for £1 a point at $99.
Around one year later, a review of her account revealed that the trader had made a profit of an amazing £20,000. Believing that there had been some kind of mistake, she immediately contacted the customer support team at her broker, however the price of Google shares had actually climbed as high as $300, increasing at £1 a point by around 20,000 cents!
- Bond Trading
A bond is an interest or debt bearing instrument which can be traded and represent one way for governments and companies to raise sufficient money so that they are able to pay for their investments.
Should any future change to long term rate of interest be something that interests you, it could be worth trying to speculate on bonds. A lot of investors choose to include bonds in their investment portfolio since they have a reputation for stability and safety when compared to stock market trades. Some investors also choose to trade in bonds as a way of hedging against any pre-existing government bond holdings.
The majority of providers will offer a good selection of government bonds from around the glove for investors to try speculating on. Usually, these include all of the main categories of international bonds like 10 Year Treasury Notes, U.S. Treasury Bonds and UK Gilts.
Spread Betting's Hidden Costs
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.
Choosing The Right Provider Of Spread Betting Services
Now you are more familiar with the basics of trying out spread betting, you probably can't wait until you can start practising by opening your own trading account. However, before you rush into anything, you need to be aware that you have to choose a spread betting platform that can match your expectations and needs, since this is sure to improve your chances of trading profitably.
Take a look on our website and read our reviews of some of the best brokers available today where you can find out more about their weaknesses and strengths. Spread betting brokers also helps you to explore all of the primary important qualities to look for in your chosen broker as well as how to go about choosing the right one to suit your requirements. We even feature a section which is dedicated to managing your risks as well as blog posts which will help to keep you informed about trading techniques and market insights.
The key to success is to keep learning and keep reading before you start trading.
Glossary Of Spread Betting Terms
Sometimes called “buy price” this refers to the price which the buyer pays for their security. It is quoted within a bid/ask quote.
The term “bear market” means one which is seeing a fall in its value. Traders who think that the price of stock is about to decline can be described with the term “bear” or is described as having a “bearish outlook”. The term “bull market” is the opposite of this.
This refers to the price that the traders is able to sell the security it. Sometimes called a “sell price”.
Difference between bid and ask prices.
Apart from taxation, world governments also borrow money in an international credit market by issuing bonds which are debt-bearing instruments which are able to be traded.
This term described a rising market which is characterized by increases in share prices by more than 20%. Bulls are also traders who think stock market prices are rises. The opposite of “bear.”
Capital Gains Tax
This is a 28% or 18% tax which depends on whether the trader pays income tax at the higher or basic rate. It is paid on any profits on selling shares (which are not in a PEP, ISA or NISA). When spread betting, it's possible to earn an extra 28% or 18% return on trading profits.
A commodity is a tradable raw material or primary agricultural product. Some of the most popular commodities for trading including precious metals, sugar, coffee, agricultural products like beef, oil and gas.
Daily Rolling Rate
This charge is applied for every day that a trade remains open. This fee generally includes the provider's standard rate as well as a 1-month Interbank funding rate (such as LIBOR).
Exotic Currency Pairs
An exotic currency pair is made up of a major currency which is paired with another currency from a smaller or emerging economy. Since exotic currencies are sold and purchased in large volumes, the spreads are generally very narrow. Since these emerging and smaller economies have a financial, economic and political environment which changes rapidly, their currencies often make larger and speedier moves allowing the potential for greater profits.
Going Long refers to placing a “buy” bet which you would do if you think the market will rise.
Going Short refers to the occasions when a trader places a “sell” bet as they think the market is going to fall.
Companies and investors use hedging as a way of protecting themselves while reducing their exposure to risks.
When people use the term “markets”, usually they are talking about indices. An index measures the change in several stocks which represent a specific market (or part of one).
During spread betting, traders benefit from using leverage which allows only a small amount of money to be put down as a deposit on the security's price in order to open trades. This means profits may be hugely amplified.
Liquid markets are when there is a lot of demand from sellers and buyers, resulting in low volatility and narrow spreads. Trades in liquid markets take place easily and quickly and at low cost due to the large amount of ask and bid offers. Low volatility also means changes in supply & demand will have only a minor impact on the prices.
A margin refers to the amount of money required to open positions, defined by a margin rate. This different depending on the security chosen for spread betting. Margin trading enables investors to speculate with just a tiny amount of the amount of money which would normally be required.
This describes a price change in a security. It is the smallest price change possible in the security that is being speculated. E.g. should the FTSE market experience price movements from 6331.95 up to 6331.97, the price change is 2 points.
Usually all major currency pairings are quoted to 4 decimal places, with the final digit being named a pip or point. E.g. if the EUR/USD pair had a quote of 1.0661 as its bid price and 1.0664 as its ask price, the spread is 3 pips.
When the bet approaches expiry, it will be closed then another bet in the same direction and size will be opened to cover the following period to prolong the exposure of the bettor to that security.
Securities are assets which are tradable on the markets. Commonly, the term means any kind of financial trading instrument.
A trader can short or “sell” a market when they think it is going to fall. It is also possible to “sell” if you wish to close out on a pre-existing “buy” bet.
A share is a fraction of the value of a company which is owned by an individual. Shares are traded via stock markets like the New York or London stock exchanges.
The spread is the amount of difference between the sell and buy price of any security. Sometimes called the bid/ask spread, it can be influenced by a number of elements like supply & demand, or the total trading activity or liquidity of that security.
The term “stock exchange” is used to refer to an exchange or market where securities like bonds and shares can be purchased and sold. Prices in the stock market are dependent on supply & demand.
A stop loss orders a security to be sold at a specified price to limit any loss.
This tax (currently standing at 0.5% in the UK) is applied to all share purchases in the UK. Spread betting is exempt from stamp duty, therefore a short or medium term spread bet could well be more affordable than purchasing the securities themselves.
Volatility refers to how much variation there is in a trading price in the market over time.
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