Spread bets can be much more cost effective than actually owning an asset. Because you never take ownership of the shares you are trading, there’s no stamp duty to pay. Spread betting firms make money from dealing spreads and interest charges.
For spreadbets no direct commission is payable and speculators instead pay in the form of a spread (usually 10-15bp). As when dealing ordinary shares or any other asset, these firms always quote you two prices: a lower one at which you can sell and a higher one at which you can buy.
The difference is called the “spread” and it will be based on the market spread. Where commission is not being charged, a bit extra is added to the spread by the provider. The size of the spread varies for a whole range of reasons, mainly lack of liquidity, the broker’s own greed, competition, etc. The old adage applies here ‘to the vic the spoils, but to the broker, the SPREAD’ – although one has to note that the fierce market competition has really brought down spreads considerably over the past few years. The relative volatility of commodities means however, that spreads on volatile markets like commodities means that the spread is sometimes higher than for other underlying assets.
Are there any dealing commissions or other charges payable to the spread betting provider?
No. The only cost to you is the provider’s dealing spread, which is the difference between the selling price and the buying price for each market. There are no fees, stamp duty or brokerage charges. However, for ‘Daily Rolling Share’ bets, funding is charged daily for long positions and short positions.
Each spread bet has different margin requirements and these generally range from 3% to 10% of the price for most spread betting market. There may be other costs to consider, including financing (i.e. interest costs), but this depends on how long you hold the spread bet.
Having a spread bet generally involves daily interest costs. When you do a “buy” trade, the provider charges you interest on its total. Typically, this interest rate is based on LIBOR, plus a mark-up. When you do a “sell” trade, your provider may end up paying you interest on the value of your trade, albeit at a lower rate than they would charge you if you were buying.
Longer-term spread bets and CFD trades based on futures contracts don’t carry a daily interest charge, you just pay a wider spread when you buy and sell.
Also, traders have to deposit a certain amount of money (guarantee) referred to as margin in their spread betting account to cover the bet. Should losses accumulate or exceed what is deposited in the account the investor may end up facing a margin call meaning that the spread trader would have to top up the account with more monies.
