Spread Trading Questions

Can you give me an example of the cost of a trade and the period the spread bet is open for?

I use Capital Spreads and IG Index. The cost is the spread (+ a small % if you use their limited risk option) and that is it. The spread is slightly wider than the London Stock Exchange, and you can have rolling daily, 3 monthly, 6 monthly or 12 monthly bets.

If you intend to hold for as long as possible then take out the one with the furthest date. This will have a wider spread to essentially pay interest on your margin. If you intend to trade the share rather than hold then you could opt for shorter period or even rolling daily bets- you will be charged interest on your holding if you let your position role, it won’t ever close automatically. The interest isn’t unreasonable, a few percent per annum based on the margin you have borrowed.

Be careful when you calculate your position size that if all goes tits up you can pay up! For example, if the share price were 100p and you bought £100 pp that would expose you to £10,000 of risk – 100 x £100. If you are new to Spread betting have a look at IG because they offer a 6 week course (online) where they email lessons to you, and they also offer a limited risk option which has guaranteed stops so you don’t suffer from slippage should it move against you. The benefits for me are the margin and no tax to pay.

Is it okay to trade shares with £1000?

Your pot is just too small to work properly. The dealing costs and stamp will kill you. It might be better to see if you can get your pot up to at least 5,000 which I would consider the absolute minimum you would need to be able to trade. You can certainly get more exposure with spread betting but I’m always wary about advising people to begin their trading career by spread trading as it is so easy to be tempted to utilise too much leverage which can be dangerous.

Spread Betting, is there a market cap limit below which spread betting companies will not allow positions to be opened or is it on a company by company basis?

Most wont do under £50m. GFT and Spreadex do. It seems most spread betting companies, while they’ll do £50mln market cap for UK stocks, won’t do less than $500mln for US stocks, so it’s not easy.

I’m looking for a spread betting company that allows minimum bets of 10 pence on the FTSE100 and other indices. Any out there?

Open the position at £1 (or whatever the minimum), then close 90p of it and leave the last 10p running.

IG Index allow it through ‘Tradesense’ for new clients, if you haven’t had two stints using it then give them a call to discuss, six weeks per each time put onto it. Or ring IG and ask if they will let you do a re-run of the Tradesense program, giving you bets from 10p for 6 weeks.

Alternatively take a look at spread betting ISF – this is the ishares FTSE 100 ETF. You have to deal with the spreads, particularly on longer time frame bets (often better to take close month and let it roll depending on pricing at the time, if you are taking counter trend positions longer months can work in your favour sometimes). Anyway at £1/point this is essentially a 10p/point trade on the index, you can only trade it during LSE hours though. Good luck.

Do you ever see spread bets being taxed?

Unlikely. Why? Because the majority lose and if spread bets were placed in the tax arena then those losses could be offset against tax and the treasury would lose out. The theory is that changing the law would not be financially beneficial to the treasury. Most speculative private investors lose money, so the argument would be that if you are taxed on your gains, you should be able to offset your losses. Besides, the companies that run the speculative instruments for the private traders make money as do the large investment houses and the treasury gets income from their corporation tax. Suffice to say that if HMRC thought that they could get additional money through taxing spread betting, they would try but as it stands at the moment, they would lose money trying.

Spread betting is tax free, if you were taxed upon profits you would be able to claim on your losses. As 80% of punters fail the revenue would be in a bad place so I believe they defer. I use spread betting companies to avoid CGT as gains over you annual limit aren’t liable for tax.

Personally i don’t see the problem with spreadbetting if you are sensible

Quite agree! The thing is, most people aren’t sensible. If you simply use an spread betting as a tax-shelter for an investment and don’t use leverage, it can work well.

Does this not turn us into “traders” increasing volatility?

Like T20s? depends how long you hold for, contracts can be bought for 1 day, 3/6/9 months. They can roll automatically so there is very little difference to owning a share except you really need to manage your stop losses and margin.

One question I’ve never quite understood – If folks go long or short using spread bets, does it translate to real shares being bought or sold anywhere? My understanding was that these accounts use share derivatives of sorts. Is that right? And do these type of trades move share prices to the same degree as buying/selling actual shares?

I think it depends on liquidity and the size of your spread trade. Let’s say a share like BP. IG will have long and short trades on these that they will offset against each other and will most likely hold the balance in shares (although they don’t have to). Let’s say you decided to go long at the same time I went short. I would essentially be betting you with IG holding the book. A less liquid share then IG may decide to protect their position and buy the stock knowing they can use the wide spread and DMA to ensure they make a profit on a trade. When I opened my AAAM position (didn’t buy in ISA in the end due to possible split) an equivalent sized buy went through plus at the same time (can’t prove it was mine but likely). For reference I have this on a 9 month contract with a view to a long term hold and will likely roll it over when the time comes. I have this position well funded to hopefully avoid having my stop triggered – I am holding as if it were stock.

“Whatever led you to believe that the spread betting company actually owns any shares on which you are placing your bets?” They have to – the spread-betting company, to remove any risk, hedges in the market, i.e. it buys or sells as necessary so that whatever happens to the share price, it is cash-neutral as far as they are concerned. They make their money on a bit of commission and/or a bit of spread. If they NEVER buy or sell in the market, that means the spread-betting company wins whenever you lose, (and vice versa) which is the worst kind of conflict of interest.

‘They have to’ They don’t have to. You could argue that overall, by capping position sizes, they’re hedged by diversity. I’d imagine they buy a proportion of shares to hedge and you can often see the nominee holdings relating to positions in say Spreadex. Bear in mind also that all short positions offset those of longs. That reduces the need to buy/sell to hedge. Having said that for big deals a spread betting company does seem mostly to buy or sell the shares. The price they get for the shares determines what price I get, which always is slightly worse to allow for their commission.

I went long on AHT at 90 a couple of weeks back and should have closed at 1.00 but held too long , My stop was placed at 80 but when this moved north I moved the stop to 88 – Just checked my SB account and I’ve been closed out this morning at 9.28am. The chart on my SB account shows a dip from 95 to 87 at this time and then a bounce back up again. The chart on ADVFN and other charts do not show the dip that low.

I’m fairly new to spread betting and have lessons to learn but I cannot understand why this would be. Is it just the SB company I use applying a massive spread combined with the MM’s playing with the bid price or something else? Looking at the chart over the past few months I cannot see another sudden dip like this.

Unfortunately I’ve heard your story time and time again. You really have answered your own question. That’s why I use wide stops. You revealed your hand to the spread betting company. Suspect the worst and most corrupt manipulation possible and you’ll be spot on. We went into auction for a few minutes this morning which was probably the smokescreen to take lots of positions out. The share price did drop…. but not to 87p. That is taking the piss (pardon my vernacular!). Complain with the spread betting company and be persistent (they are bookies after all) – but if you use wider stops you won’t have such problems. Understand we all get hit and take this one as a lesson learnt.

..to catch out those spread betting with stop losses and enable the market makers to accumulate shares..

I’m not sure to what extent that might work. Spread bet bookies don’t always buy/sell the stock that we punters are betting on – sometimes balancing long bets against short bets and only taking a market position in the unmatched remainder. So a lot of bets closed by hitting stop losses will not necessarily involve any actual shares being traded.