This is the second post in a series I am covering about spread betting. If you missed the first spread betting introduction post, you can read it here.
In part 1, we discovered that financial spread betting refers to spread bets placed on global stock, currency and commodities markets. We also looked at how the leveraged nature of spread betting can be the undoing of many a trader.
In today’s post, you will learn the main differences between traditional share trading and spread betting.
We will have touched upon one or two concepts in part 1 already.
Spread betting v Traditional Share Trading
The main differences are:
You are able to “short” shares – make money from shares going down in value – with spread betting unlike traditional share trading. Shorting is a concept that a lot of non traders struggle with since they almost always believe that you can only make money from shares going up in value. Shorting is a handy tool to have, especially in bear markets; a lot of traders did well during the financial crises by shorting financial shares.
When you open a spread bet on a UK company, you do not actually own any shares, even though you can still make a profit (or loss) on the share price of the company. The price of each share spread bet is based upon the price of each company listed on the London Stock Exchange. The spread betting firm sets the price and prices vary from firm to firm.
When you buy shares in a company that pays dividends, then you are entitled to receive those dividends as a shareholder. When you place a spread bet on a UK share, you do not own shares so you will not receive dividends. Some, but not all spread betting providers do pay dividends on UK shares, but you will need to check their terms and conditions to find out.
- Time limits
If you purchase shares, you are able to sell them at a time of your choosing, subject to a few conditions such as the company not going bust or the shares are de-listed. Spread bets have expiry dates, meaning that if you open a spread bet, it will close at a predetermined date in the future either at a profit or loss. As a trader using a spread betting firm, I have to keep an eye on expiry dates to ensure that my spread bets do not close prematurely.
Expiry dates can range from the end of the same day on which the spread bet is opened to six months. You can “rollover” your position before it expires which basically means telling your spread betting firm to open a new spread bet in the same company when the old one expires without incurring the full cost of opening a new spread bet. In essence, rollovers are a cost effective way to keeping a spread bet open beyond the expiry date.
If you buy £2,000 worth of shares, you will need to hand your broker £2,000 to do so. If you want to open a spread to the same value (£2,000), then you would hand your spread betting firm a deposit, the rate of which is set differently by each spread betting provider (you will need to check their terms and conditions). If the deposit rate is 20% for example, you would only to pay £400 to your spread betting provider rather than the full £2,000.