Traditional share dealing is one of the most popular forms of trading; and spread betting makes the shares market very accessible. In traditional trading, you cannot sell (go short) on the share price and can only buy shares that you can afford; with spread betting, you are able to buy and sell shares and because all bets are leveraged – you are able to bet on share prices with much larger exposure (think Apple Inc).
Spread sizes on shares are often calculated as a percentage of the share price and the most competitive companies will offer just a 0.1% spread on major stocks.
What is a daily funded and quarterly shares bet?
When betting on a share price, you will be given the choice of two options: a daily funded bet and a quarterly bet.
Daily funded spread bet (DFB)
A daily funded spread bet has a charge that is incurred for each day that the position is opened. This charge will often be around 0.1% of the total value of the bet. As spread betting is leveraged, there is also a charge on the money that is being borrowed to fund the bet – this varies but will be around the LIBOR (base rate) + 2.5% per annum.
It’s February 21st 2013 and the price of the GlaxoSmithKline rolling daily is 1455.4/1458.3 – some news about a recently approved patent emerges and you decide that the share price will increase. You buy the stock at 1458.3 at £25 per point.
Later that day, the stock increases to 1461.3/1464.2 and you quickly close your position – selling at 1461.23.
Opened: 1458.3 / Closed: 1461.3 / Difference: 3 / Profit: £75
Quarterly spread bet
Depending on how far in advanced you place your bet, a quarterly bet will have a higher spread than a DFB, often ranging from 0.35% to 1%. Quarterly bets can be placed as ‘near’, ‘far’ and ‘very far’ i.e. the closest quarter to the farthest quarter.
Quarter bets will not incur the daily funding charge of a DFB but will be subject to the interest rate on leveraged funds and will roll over in the next quarter. i.e. when the quarter finishes, the bet is closed and opened again which can prove to be quite expensive.
On November 18th 2012 a stream of damaging strikes in the mining sector lead you to believe that the share price of Lonmin PLC will fall over the medium-term.
The stock is trading at 576.9/579.6 and you decide to sell at £20 per point. It’s now one month later and you prediction hasn’t worked out – the mining sector is booming with Lonmin leading the way at a share price of 584.9/587.6. You decide not to wait for the quarter to rollover and buy back you shares at a loss.
Opened: 576.9 / Closed: 584.9 / Difference: 8 / Profit: -£160
In each example your share holding is the equivalent of 2500 shares and 2000 shares respectively. This is because a one pence movement in share price would equal your bet of £25 (with the DFB) and £20 (with the quarterly bet).