What is Spread Betting and how to do it?
Financial spread betting is a product that allows you to bet on price movements in 100s of financial markets including FX, indices, shares, metals, commodities and treasuries, without having to physically buy the product.
It is, in short, a bet on the future movement of an underlying instrument (e.g. FX). So, if you believe that the underlying instrument is going to rise in value you place a buy bet, if you think it will fall you place a sell bet.
As with FX, the value of each underlying instrument is quoted as a bid/offer spread (the difference in the price at which you can buy or sell the instrument). Spread betting lets you place a bet of any value against market movement in any direction, measured in £s per point. Therefore when the market moves 1 tick, you will make or lose the number of £s per point you traded. For example, if you trade £1pp when the US30 moves from 17000-17001, you will make or lose £1. You can “bet” on multiples (and fractions) of £s per point e.g. £0.10, £1.50, £2, £5 ,£10 per point – but remember that this can significantly increase potential losses, as well as profits.
To close a spread bet you place the opposite bet in the same instrument at the same value per point. (For a BUY bet you sell at the current price and for a SELL bet you buy at the current price).
Your profit (or loss) is the difference – spread – between the opening bet and closing bet, multiplied by the value per point of your bet.
When it comes to what is the Spread Betting margin requirement necessary for a spread bet, you will multiply the price by the quantity and then multiply this by the margin percentage for that market.
For example, Barclays are trading at 230 and we offer a margin of 5%. If you bought £10pp then the margin required will be:
(230*10) * 5% = £115
Please note that you will always calculate the margin in GBP since you are trading in £s per point.
Daily Funding Charges
On non FX positions, daily funding charges will be applied for all products that are not futures contracts. It reflects that this is a daily product that has been moved to the next day and not a futures product where the spread would be wider to incorporate these costs.
ADS Securities London Ltd offer a financing rate of 250 basis points. The financing cost will be the exposure of your trade, multiplied by our rate, above or below LIBOR. You will + LIBOR for long positions, and – LIBOR for short positions.
To calculate the daily charge, it can then be divided by 365 or 360, depending on the market traded.
The following calculation can be used:
(Price * Quantity) x (2.5 +/- LIBOR) / number of days
Please note that although you may expect to receive financing on short positions, global interest rates are currently so low that you are likely to still be charged. As interest rates rise, short positions may receive funding. Long positions will always incur this charge.
Dividend credits and debits
All CFDs will be liable for dividend adjustments. This is because when a stock pays a dividend, it will affect the price of the share and any index it is associated to. Each stock will normally pay a dividend twice a year however, since you do not own the shares, you will be adjusted for the dividend amount to counteract the price movement. This means that you are neither advantaged nor disadvantaged by dividends when trading a derivative product.
Within the FTSE 100, the companies are very different sizes and size buys influence. The larger the company, the more weight it is given in the Index. Size is measured by market capitalisation which is the value of all the shares added together. The larger the market capitalisation the bigger its percentage of the index, and this is taken into account when dividend adjustments are made on an index.
As an example, when Barclays paid a dividend of 4 UK pence, this equated to 2.49 points on the UK100.CASH. Then there was Rio Tinto who paid a dividend of 6 UK pence but this equated to 2.87 points on the UK100.CASH.
Following recent news about UK unemployment levels you expect some strengthening of the UK economy. The XYZ Index is trading at 6201-6202. You expect it to rise, so buy a spread bet at £5 per point. Your quantity of 5 will be entered in the Volume field of the deal ticket on MT4.
For every point the XYZ Index rises you make £5; for each point it falls you lose £5. You BUY at 6202.
Later in the day the XYZ Index is trading at 6241-6242. You close your position at 6241, making a profit of 39 points*5 = £195.
Learn more about Spread Betting
Our online training tools include videos and webinars to help you understand and manage trading risks, including using “stop-loss” and “take-profit” limits to minimise potential losses.
Find out more on our Learn section.
For single stocks in spread betting a £1 bet would be per one pence movement in UK shares and £1 per one cent movement in US shares. A £1 bet in shares is equivalent to the owning 100 shares.