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
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. The spread will be shown in the sell and buy price when you place the trade.
Volatile markets 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 spread bet futures contracts (quarterly or annual), the further ahead your 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.
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.
Margins
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.
Overnight financing
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.
Inactive Fees
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.
Work out your financial spread betting costs
You can use our trading costs calculator to work out how much different brokers charge and how much trading with them will cost you over a year.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
