Key Spreads Compared
Before we begin, this is not an in-depth view of the workings of a spread firm. This is a guide to what is out there. The spread trading firms themselves give their own rendition of spread betting on their sites.
All I am trying to do is point you in the right direction and help those of you who believe that it is not possible to spread trade because of your Global location, i.e. not living in the UK, to get started.
There are spread firms that accept foreign clients but tax-laws are your own lookout and should be looked into. Ignorance does not cut it with the IRS or whoever else it falls to picking your pockets for your hard-earned cash.
- Spread is the difference between the buy and sell price of what ever you are wanting to trade.
- Minimum stake is exactly that, the minimum amount of money the spread firm will let place per point on your desired trade.
- Margin is the amount of money required to be in your account to place your trade and this is worked out by multiplying the margin by your actual stake. Some spread firms require you to have a minimum balance, which can be quite high in some cases. If the margin is low, you can also place larger stakes per point with a lot less money needed in your account.
- Virtual or Demo Trading. This allows you to practice trade without losing your shirt. You can open a Virtual account with most firms without ever having to open a funded account.
- Some providers allow clients from outside of the UK to spread trade. This is invaluable to those of you who do not live in the UK and who do not have the time, inclination and funds to set up offshore companies etc. This however is not a means of escaping your own countries Tax jurisdictions. It is up to you to seek this information out and work with or around your own countries tax laws.
To most traders the smallest spreads and the smallest margins are going to be the most significant criteria for opening an account with a particular spread firm. Spreads do vary, but which company is cheapest depends on the particular market you want to take a position on. The difference in spreads is more significant if you are trading actively, e.g., intra-day betting on indices and share prices, where spreads could form a significant proportion of gross gains. In this situation, it might be worthwhile open several accounts with different companies and for each bet choosing the one with the cheapest spread. If you are taking longer term positions, which in the context of spread betting I would personally define as a month or longer, the cost of the spread becomes less significant and it probably wouldn't be worth the hassle of opening multiple accounts.
But to traders new to the game, they are going to be on the lookout primarily for Virtual Trading, Low minimum stakes and low margin.
To those of you outside of the UK then the ability to trade at all is of paramount importance and that is where you will start your search.
I do favour opening an account at Ayondo due to the very competitive spreads and good level of customer support offered but it pays to have multiple spread betting accounts to look for the best spreads and margins. This could make sense especially if you are betting large. Each spread betting firm has its strengths and weaknesses so you have to find the one that is a best fit for your style of trading.
I started my trading career by using Finspreads and I used to recommend them but only because they used to give you an eight-week training period where you can place trades from as low as 10 pence per point. Coupled with the fact that you can open an account with them with £100, they make an excellent starting point for anyone new to trading.
Now having said all of that, I was blissfully unaware of the existence of the existence of demo platforms when I started. If I had known about it I would not have opened an account with Finspreads as quickly as I did. The 8-week training period shoots past when you are trying to learn and all it seems to do is heap pressure on you to succeed by the deadline. At least with the luxury of Virtual Trading you can take your time and learn your craft at your pace.
I currently use 2 spread firms and they are CMC Markets (formerly known as Deal4free) and Ayondo. Deal4Free initially got my business because of their tight spreads and margins but it came at a price and that is that you have to have a minimum of £1000 in your account (now I believe they have reduced this to £200), which is why I did not open an account with them until I could afford to.
Basically, when choosing a firm, make sure it suites your needs. There is little point in going for an account which pays interests on positions if you do not intend to deposit substantial funds. Bide your time and work up to opening an account that requires a lot of money.
Like anything, use what you can when you can and then shop around when you are in a better position to do so.
Comparing the costs of spread betting a number of UK stocks to traditional stockbroker dealing
Here is the original sample data (now a bit dated) comparing the costs of spread betting a number of UK stocks to traditional stockbroker dealing:
The excel worksheet is available for download here
The aim is to review the price paid for the bet, rather than the quality of the trade (cos I wouldn't dare!) so that I can compare the price quoted by the spreadbetting company against the market price. Note this is for individual shares only.
The spread betting firm's claim (and my experience backs this up) that they charge the market price with the market spread plus SB spread on far quarter bets of 0.3% in LCG case and 0.9% in IG's case ("comm %") and an interest or "carry" charge ("annual %") depending on the expiry date of the bet. You pay this if long and benefit if short. The spread itself is the cost we all incur.
To test the cost of spread bets and compare with other methods - look at the 'comm %' column - to compare with other instruments consider the brokerage charges to buy and sell, and stamp duty (if UK stock).
To test the clarity of spread bet pricing, look at the "annual %" column. This should be less than or equal to the interest charge (look in the SS) quoted by the SB provider - usulally 4.75 - 6%. If the provider biasses the quotes, it will be shown here. It is worth noting that with an offset mortgage and a credit account you can receive better interest than you are paying the SB provider for doing the deal.
To clarify, the size of bets will be around £3,500 (£ per point X No points) so the data can only be trusted for bets around or below this value.
Looking at interest charges, the SB co's are still well under 5% interest, and have reflected dividend payments in their pricing - good news! All trades executed at the quoted price (no price shocks).
I've included a quick calculation for comparing the cost of dealing through a normal stockbroker with varying deal sizes and transactions costs.
No evidence (in the calculations) of the wide spreads or bias that the spread betting companies are accused of. And the choice of spread betting versus actual ownership seems clear for these type of transactions.
Here is a log of more recent transaction costs through various spread bet firms (mainly CMC of late) - with filter for comparing costs by spreadbet firm, index, and comparing to the cost of using a broker. By selecting the company in cell N4, you can see the additional charge applied by the SB company, above the market spread at the time - and the annual interest, which would reflect any spread bet bias (i.e. it would be high). As it happens, up to now, this isn't evident.
A short piece on 'shorting' - one of the main advantages of spread betting
One of the key advantages of spread betting is that you are able to make money on falling prices as well as rising ones - that is to say that you can bet that the share price of a company (or group of companies) will go down in the future!
If you own something and its value looks likely to fall, whether it be a buy-to-let property or a surplus PC, it makes sense to sell it quickly, before too much of that drop in value occurs. The same principle applies to selling failing investments too. Indeed, it is one of the most important rules for successful investing that you should cut your losses quickly.
Identifying over-priced assets.
Sometimes we identify an over-priced asset that we don't own. It could be an optimistically priced house or a petrol-guzzling car. In our day-to-day lives, this is clearly a bit of expertise going to waste because we can't take advantage of our judgement in the same way as we could if the price were too low.
However with shares, you can profit from such a skill thanks to a process called short-selling. That means you sell shares you don't own, hoping that by the time you have to produce them for the buyer, they have fallen in value and can be more cheaply supplied.
Going short probably needs closer monitoring than would be required of a normal investment. Your potential losses are unlimited, because a share can in theory go to any height, but your profit is finite. Because a share can never be worth less than zero, your profit can be no more than the value of the investment you shorted.
It also needs some mental inversion. Good news for a company, such as better than expected profits, dividend increases, or an unexpected takeover are bad news for you. What you are looking for, indeed hoping for, are profit warnings, management incompetence and poor trading.
It is perhaps this last aspect that has got the idea of short selling (and thereby spread betting) its bad reputation. Many politicians and some economists think shorting is akin to demolishing factories and putting thousands out of work, especially when it is done by large and unregulated hedge funds. Yet short selling, so long as it is transparent and can be monitored, gives useful two-way liquidity to a market.
It cannot on its own push a company into collapse unless there is a matching shortage of buyers. Indeed, many of the fastest rises in share prices are attributed to short-sellers buying back shares like crazy to cover their losses after unexpectedly good news at a company.
Any stock market transaction by definition involves both a buy and a sell of equal size. The only difference between a conventional trade and a short-sale is that the two take place in a different order. In any case, neither sales nor purchases of shares carry any moral properties.
Having said that, short-selling is usually associated with rapid trading rather than long-term investment. Participants will normally be looking for volatility to give the quick returns required, but that also means lots of risk. If you decide you want to profit from over-priced shares, you have to be prepared for that.
Comments? Inaccuracies!!? Send your comments to traderATfinancial-spread-betting.com - I need your help to remain up-to-date! The spreads of a particular firm have changed? E-mail us and we will post and update. Please note that we try to update this comparison table continually however we cannot guarantee that its always up-to-date as the spread firms do change their spreads from time-to-time (generally making them tighter as the market becomes more and more competitive