What are the major costs and fees of Financial Spread Betting?

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.