Forward Diary

How to Spread Bet

Spread betting and trading There are many advantages to spread betting – which is a powerful and flexible tool for trader. Financial spread betting, or spread trading as it is sometimes known, enables you to bet on the price of an underlying security or asset such as a share, an index, bond, commodity or currency. It provides you with a way to play the markets without actually having to physically own anything. The idea was pioneered by Stuart Wheeler, founder of IG Index, in Britain in the 1970s, originally to allow people to speculate on the gold price when foreign exchange controls made buying it prohibitive. It grew rapidly with the development of the internet and the increased sophistication of online trading platforms. Now there is a wide range of companies offering spread betting – not only specialists but a number of traditional stockbrokers – with thousands of trades to choose from. For a new or would-be trader, spread betting offers a number of advantages compared with other vehicles or direct investment. It is relatively easy to understand and can be started with a small amount of capital. Bets are immediate – there is no waiting around for orders to be filled (although stops and limit orders will only be triggered if the price hits your pre-determined level). And betting in sterling has the advantage that there are no currency complications to worry about. The trading process is very similar to using an online stockbroker, except that rather than specifying the number of shares or the amount to be invested, the customer decides on a stake per point. Points are based on the actual price of the asset in the market. For example, if a bet were to be placed on the FTSE 100 index with a stake of £10, the profit or loss would change by £10 for every one point move in the index. Tax and charges Spread bets are free from UK stamp duty on share purchases, which saves you from the 0.5% charge that applies when going direct with a standard investment. For active traders who may be in and out of a trade within a day, that’s a saving which can rapidly add up. There is no income tax to pay on dividends, as spread bets do not pay dividends but instead build the divi into the bid-offer spread. Neither are spread bet profits subject to capital gains tax. An important proviso is that while spread betting is tax-free, this may not apply to your profits if financial markets trading is your main source of income. As with other forms of trading and gambling, if HMRC decides you are doing it for a living the situation is likely to change and you will be liable to tax on winnings. There are financing charges that apply to long spread betting positions held overnight, typically LIBOR plus 2.5% per annum. This only applies to the portion of the trade that is not covered by margin, so if the spread betting firm’s margin on a particular market is 10% you would pay financing costs on 90%. If you are short-selling, there may be a daily charge for the spread betting firm to borrow shares to sell short while the period is open. It would still take some weeks, probably months, for financing charges to match stamp duty on a standard share purchase – but remember the 0.5% charge only applies to UK shares (although some other countries do have comparable taxes). The main charge for spread betters is in the dealing spread – the difference between the price you can buy at and the price you can sell at. The tighter the spread, the lower the charge and the quicker you will be in profit if the market moves in your favour. Some of the tightest spreads, at around 1 point, are available on major equity index bets such as the FTSE 100 and Wall Street (Dow Jones Industrials Average). Spread betting providers derive their quotes from the underlying markets, taking the prices of the various securities and adding a little extra to the bid-offer spread. As there is no commission or stamp duty, this represents the full round trip (ie opening and closing) cost of the trade. Placing a trade As previously mentioned, spread betting is a margined product that only requires you to put down part of the full value to open a position. The required margin is typically between 1% and 10%, depending on the market, though it could be as high as 25%. There are different types of spread bet, designed to suit different traders. For example, ‘rolling’ bets are rolled over each night with no expiry date, with the position closed and then automatically reopened at the same level the following trading day. Monthly or quarterly futures spread bets have a fixed expiry date but as this approaches any positions can be rolled over to the next period. Day trade spread bets expire at the end of the day, but their availability is limited. The choice of bet comes down largely to how long you expect to leave the position open. Longer-term positions – that is those of more than about three weeks – generally work out cheaper with a quarterly future, where the cost of financing is built into the quote. The mid-point of the spread will normally trade at a fair value premium to the actual cash market price and gradually erode over the remaining time to expiry. Shorter-term trades are better value with rolling or daily bets, where the daily financing cost is charged separately and which are more transparent as the prices and spreads are closer to the underlying investments. It is not always easy to see how a spread-betting quote relates to the market price and sometimes clients complain a provider has widened the spread against them. However, most firms simply add a fixed percentage to the underlying bid-offer spread and if the quote widens or narrows it is merely reflecting what is happening in the cash market. Rock around the clock Spread-betting firms generally make their clients’ accounts available 24/7. While it is normally only possible to bet on a stock when the relevant exchange is open for business, some markets such as major indices are run 24 hours a day. For traders who are holding down a normal day job, the North American equity markets are particularly convenient as they remain open until 9pm UK time, allowing a reasonably long window to trade in the evening. Out-of-hours trading allows customers to take a view on what they think is going to happen the next day. When the market is open, the spread betting company will base its price on the relevant futures contract, but at other times will calculate its quote according to the performance of the markets that are still open and the balance of business on their books. Currency markets are open around the clock. It is also possible to bet on most commodity markets at almost any time of day from Monday to Friday. You can gain exposure to any market regardless of the direction you think it is heading, going long (ie buying) if you think the price will rise and short (selling) if you believe it will fall. Opening an account Applying to open a spread-betting account online is not usually complicated, involving the provision of straightforward personal details on an automated form or print-out. The provider may need to verify your identity and then confirm your account details via email. Once open, you will need to transfer money to the account in order to start trading – a minimum of £100 is typical. However, funding is not usually essential if you just want to activate the account, familiarise yourself with the platform, try a demo and look at the tools available. The platform will give you access to live price feeds, normally with the addition of charts, fundamental data and news. Many providers now offer mobile trading platforms too – including versions for iPhone and Android – in addition to regular online trading.