Watch the Spread!

The spread changed from the open to the close. This is quite normal. The spread can change throughout each day as the market spread changes. One of the things you need to do is be aware of, or even note down, what the normal spread is. Allow some latitude but occasionally the spread widens very significantly. You do not want to be caught out by an abnormally wide spread - it can cost you a lot of money - believe me, I have been there!

Do not open or close a trade if the spread is abnormally large.

For example, the spread for Premier Farnell is normally between 1.1 and 1.8 (at the time of writing) and I will not trade it when the spread is much over 2.0. Often if you wait for a few minutes the wide spread will narrow again.

The reason the spread changes is because the market spread changes on the Stock Exchange floor. The reasons for this are beyond the scope of this book. You will find that first thing in the morning when the Stock Exchange opens at 8 am the spread can often be very wide but will usually settle down within the first 30 minutes to an hour. Often within 15 minutes for FTSE 100 companies.

This tip will save you a lot of money and anger - I promise you!

On the screen (trading company website) you will see a display of the buy and sell price for the share you wish to trade. Check that this is acceptable and is the price you wish to trade at.

You will then hit the button to TRADE and will be given a short time to confirm the trade. The ACTUAL price will appear on the screen for your trade and you need to click to confirm the trade. You MUST make sure that the actual trade price is the one you want.

The spread can change in those few seconds and it is easy to overlook this until it is too late - and there is no going back. I am afraid to say that this has caught me out more than once and it is easy to think that someone has it in for you and trying to trick you but that is not the case. The system is totally automated and if something happens on the Exchange floor that causes the spread to widen dramatically, it will simply be reflected in the prices offered to you. Refuse the trade, wait a few minutes or even seconds and try again.

TIP -:
  1. Check the price indication on the screen is OK.
  2. Interest rates applicable at the time.
  3. Check the actual dealing price is the same before confirming the trade.

The other thing you will notice from the 'short' example in Figure 4 is that the spread does not span the market price evenly. It can even be that the spread quoted by the trading company is completely outside the market mid price. For example, the market price can be say, 426 and the spread might be 430 - 434. Do not worry too much about this as long as the spread itself is acceptable. Generally, as the market price moves, so does the spread and the only thing that matters is the difference between the opening level and the closing level - the number of points made or lost.

The detailed reasons why this happens are beyond the scope of this book but primarily it is because the trading company price is based on a formulae including -:
  1. The futures price
  2. Interest rates applicable at the time.
  3. Payment of any dividends due before the contract expiry date.
>> Next Page - The Importance of Points

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