The main differences between spread betting companies article gives you an overview of some of the most well-known areas to consider when comparing spread betting companies. However, there are a number of more subtle differences that are very very useful to know if you really are to pick the best spread betting companies to suit your investing needs.
Platform performance in many ways is more important to technical traders than fundamental traders, however it is still an important consideration when assessing how good a spread betting company is. You will soon realise though if you're trading with someone with a poor platform, as you'll be complaining about the speed, and shutdowns.
The dreaded margin calls. This really can differentiate spread betting companies depending on your investment style. Margin calls are explained in our glossary, but essentially if your trade moves into a loss making position, you may be required to add more funds into your account on top of your initial deposit.
Where spread betting companies differ is in their process for automatically closing positions given certain movements in a trade. Some spread betting companies have stricter and tighter risk management processes, meaning that your position will be closed after certain movements in the product price if you do not make the relevant margin calls in time. During times of significant volatility, this can have implications on your trading portfolio that you may not have been aware of, therefore it is important to understand before you start trading.
An overly simplistic example here helps illustrate the essence of the key point to understand here:
You have a position on the FTSE 100 index, £1 per point, bought at 6000, no stops, and you deposited £50.
Overnight, some bad news in the US pushes the afterhours FTSE 100 index down to 5500.
Company A makes 3 margin calls during the slide, which you don’t act on, and closes your position at 5700 (because this, meaning you lose £300 in total.
Company B also makes margin calls that you don’t act on, but doesn’t close your position, meaning you wake up an you position is £500 down.
In the morning, the FTSE bounces back to 5900.
Company A, you no longer have a position with.
Company B, your position is now only £100 down.
So you can see, that depending on the spread betting company you use, there can be different outcomes during times of adverse movements on your trading positions.
We’re not trying to promote one company over the other here, nor are we suggesting that you should trade without stops; the point is that depending on your risk tolerance and investment style there are different outcomes for the same scenario depending on the margin call process for the spread betting provider you use. There is a reasonably well-publicised campaign against IG Index for their approach to margin calls and closing positions costing an individual large losses, however it shows that it pays to read the terms and conditions and understand the process before you get too involved in spread betting.
So how do you know which company has stricter margin calls than others? The key things to look out for in the terms and conditions are maxiumum computer generate stop levels and stop loss policy wordings.
Spread betting comes with all sorts of warnings about the fact that you can lose more than your initial deposit, which is true; however an easy way to manage this is through the use of stop losses. However, stop losses come at a price, and that price differs across the different spread betting companies.
If you are intending on using stop losses a lot therefore, it is very important to compare the combined cost of the spread offered by the spread betting company AND the stop loss costs, in order to determine which spread betting company has the best price for the product you are trading.
As you’ll be aware by now, spread betting is leveraged. However, this leverage is not free. In general, when you trade futures positions, the cost of the leverage is implicit within the spread offered, and therefore comparing the spreads between companies sufficiently takes this into consideration. However, on rolling daily (or daily funded) positions, the leverage or financing charge is not typically included in the spread, therefore depending on the length of time you intend to hold the position, it may be useful to compare the costs of financing charges across the spread betting companies, as well as the spreads.
An example of how the financing charge is calculated by Word Spreads is shown below:
Vodafone’s share price spread is 124-125
Buying shares example:
You buy 125 at £10 per point.
Your underlying shareholding value is therefore £1,250.
Interest charge is 3%pa +2.5% pa margin to the spread bettor, totalling 5.5% or 0.015% per day.
The daily interest charge is therefore 0.015% x £1250, giving 19p financing charge.
Selling shares example:
You sell 124 at £10 per point.
Your underlying value is calculated as £1,240
The interest charge is 3% less 2.5% margin to the spread bettor, totalling 0.5% or 0.0013% per day.
The daily interest charge is therefore 0.0012% x £1240, giving a 1.6p interest charge.
Investing in stocks that offer a high dividend yield has long been a common strategy within the investment industry for years, and the fact you don't physically own the stock doesn't restrict spread bettors from receiving dividend payments. In general, if you are trading quarterly individual share prices, then the dividends are factored into the quoted price, and therefore you are not entitled to receive a dividend payout. However, if you are trading rolling daily or daily funded bets, the terms are generally very different. With these types of bets if you have a long position, you tend to receive 80% of the gross payout, but if you have a short position, you tend to have to pay 100% of the gross dividend.
As you can see therefore, it is worth finding out the dividend policy of your chosen provider, and understanding exactly what type of product you are trading. Receiving the dividend on long rolling daily positions can be a significant part of your investment strategy, however bear in mind that these products come with associated financing costs - as discussed below.
Just as in the banking industry, it’s never impossible for a company to fail. So if you come across a spread betting provider that is offering better everything than the competition, it is worth doing a bit of due diligence just to identify whether there are any financial concerns over the company itself, e.g check its credit rating.