What are the costs and trading fees?

Spread betting providers will not charge you direct fees for trading but make no mistake there are still fees! Spread Bets do not attract commission; instead, the difference between the bid and offer price (the ‘spread’) is widened. Similar to buying shares or most other financial instruments, there are two prices for any spread bet: a higher one when you’re buying (also known as going long) and a lower one when you’re selling (also known as going short). The wider the difference between the two quotes, commonly referred to as the ‘spread’ or ‘bid-offer spread’, the more you’re paying to trade.

Thus, the fee will take the form of the bid-offer spread when you are ‘buying’ (going long) or ‘selling’ (going short) a market and the bid-offer spread will usually be a little wider than the market spread you are trading. Most spread betting firms will simply take the bid and offer from the underlying market and then add a fixed mark-up which makes up their profit margin; i.e. providers operate with a fixed spread, and convert the underlying asset to a spread bet price quote. For example at IG Index they add 10 basis points per side to daily bets on FTSE 100 shares so if Vodafone Group (LSE:VOD) was trading at 175 – 175.2, the daily spread would be quoted at 174.9 – 175.3.

For highly traded markets, the spread will usually be quite tight and for popular markets such as the FTSE and Wall Street, the spread could amount to just 1 point. For less liquid shares such as AIM shares and less known commodities this cost is likely to be greater.

I don’t understand what you mean by 10 basis points?

This is best illustrated by an example:

IG Index spread charges for FTSE 100 UK shares on the Daily period amount to 0.10% and this would be charged on the way in and out of the trade. So if the Cash price on Vodafone is £1.60 or 160 pence (which is how it would be priced on the LSE on IG Index) then the daily funded bet price would be calculated as follows:

160 x 0.10% i.e. 160 x (0.001) = 0.16 Therefore price to BUY is 160 + 0.16 = 160.16

The spread betting company will also charge you interest on any long spread trading positions held open overnight. This interest is known as the overnight financing charge and is charged on long positions. This interest is usually charged on the entire value of your position, irrespective of how much you have in your account. Your trade size will then determine how much you make or lose per point movement. If you traded £100 per point on long trade on Vodafone and you bought at 160.16 if the BID price (as you would need to Sell to close) then increased to 165.16 this would represent 5 points increase and you would have then made £500 profit.

So as we said if you take a daily period bet on a share you will have a funding charge reflected on your account each night if you hold the position after 22:00pm. This financing charge can be payable on either the full trade or the difference between the total value of any trade and the margin deposited although usually as we have mentioned above it is charged on the entire value of your position. Typically this financing charge only applies on daily trades which are rolled overnight. In normal circumstances, customers pay this financing charge on long positions but receive it on short positions.

For short term traders despite the funding charge due to the tighter spread this is normally a more cost effective time period. Below you can see an example (in practice the financing fee can be anything from 2% to 3.5% according to the provider).

Finance charge

For a long spread trade held overnight, you will be charged financing at LIBOR (presently 0.5%) + 2.5%. Thus, if LIBOR is (0.5%.+ 2.5%)/365 days, you’d pay 0.008% for each day you held the position.

Long position: Finance charge LIBOR + 2.5%
Short position: LIBOR – 2.5%

Although there is no limit as to how long to rollover positions, the daily funding charge applied to long positions needs to be factored in to your calculations. Often interest is charged on the full face value of your trade. The interest rate you are charged will vary depending on the spread betting provider but usually ranges from 2% to 3.5%. In reality, this can make spread bets suitable mostly for short-term to medium-term positions as longer term, financing costs can eat away from your potential profits.

Note also that spread bets closed before the end of the day are not subject to overnight rolling charges, so spread betting is therefore well suited to intraday trading.

On the other hand when you do ‘sell’ bet or trade on a share, the firm normally pays you interest*, less any dividends payable on the share you are shorting.

* Note: When LIBOR is at a particularly low rate, customers may have to pay the financing fee on short positions as well as long [i.e. receive interest at LIBOR minus 2.5%]. i.e. if LIBOR is very low, you could still end up paying a small charge even for a short spread bet since the rate would be negative.

P.S. One point to note is the example we have gone through is for the Daily period. However, there is a wider spread applied for the forward contract. For forward prices the full cost including financing is factored into the spread.

Let’s look at the various transaction costs over spread betting versus futures versus shares -:

Spread Betting:

1. The Opening Spread
2. The Closing Spread
3. Rolling Daily Fees for rolling positions overnight.

Futures:

1. Capital Gains Tax (18% or 28% yearly allowance of £10,100)
2. Stamp Duty if you are actually buying the shares

Shares:

1. CGT (18% or 28% yearly allowance of £10,100)
2. Stamp Duty (if the equity purchase is valued at or under £1,000 no stamp duty is incurred, over £1,000 it is at a flat rate of 0.5% which is rounded to the nearest £5.

Remember minimising transaction costs in trading will have a big effect on your bottom line.

Forex

The forex spreads markup is a little more difficult to analyse as there is no centralised market so spread betting providers can basically offer whatever prices they like. And even if they publish miniscule spreads you can still find yourself averaging a couple of pips using slippage.