Alright, let’s break this down nice and simple. Spread betting might sound fancy, but it’s really just another way to trade stuff like stocks, indices (think FTSE or Nasdaq), or even oil. One big thing you’ll hear about is “tighter spreads”—basically, it means lower fees.
Unlike regular stock trading, you don’t have to worry about things like stamp duty, broker fees, or admin charges. All the costs are baked into the “spread” (the gap between buying and selling prices), so figuring out if you’ve made a profit or not is easy.
How Do Spreads Work?
Every spread is based on the market’s future price. But here’s the catch: there are extra things that get added in, like:
- Cost of Carry: That’s just the fee for holding the trade until it’s done.
- Dividends: If a company pays dividends before your trade ends, that gets factored in too.
Spreads can change a lot, depending on how wild the market is. If things are calm, spreads adjust slowly. If the market is all over the place, spreads can move faster.
Pro Tip: As you get better at this, try opening accounts with more than one company. Why? So you can compare spreads and always get the best deal for your trade.
Why Doesn’t the Spread Bet Price Match the Market Price?
This part can be a bit confusing, but stick with me! The price you see for a spread bet isn’t always the same as the price of the actual stock or commodity. Here’s why:
- The Asset You’re Betting On: It could be shares, an index (like the FTSE), or even oil.
- Time Frame: The length of the bet changes how it’s priced.
For example:
- If you’re betting on a stock index future, the spread bet price usually won’t match the cash price from the stock exchange.
- Why? Because of things like interest costs (cost of carry) and dividend adjustments.
How Futures Work in Spread Betting
When you bet directly on futures (like quarterly FTSE futures), you don’t have to worry about those price adjustments. Futures prices already include the cost of carry and dividend stuff.
Understanding the Relationship Between Spread Bet Prices and Underlying Prices
One of the most common sources of confusion for beginners is the difference between the spread bet price and the underlying asset price. This relationship depends on:
- The Underlying Instrument: Shares, stock indices, or commodities (e.g., oil).
- The Time Frame: The settlement date determines how the bet will be priced relative to the asset.
For instance, when betting on stock index futures, the midpoint of the spread won’t usually match the cash market price you’d see from an exchange like the LSE. Here’s why:
- Interest Costs (Cost of Carry): Futures prices are generally higher than cash prices because of financing costs.
- Dividend Adjustments: If a stock is expected to pay a dividend, the future price might actually fall below the underlying price.
The Role of Futures in Spread Betting
Spread betting directly on futures contracts (e.g., quarterly FTSE futures) eliminates the need for manual pricing adjustments. Futures prices already include:
- Cost of carry
- Dividend adjustments
What About After-Hours Trading?
When the markets are closed, spread betting companies turn into a mix of market makers and bookies. They base their prices on what other big indices like the Dow, Nasdaq, or DAX are doing. It’s not perfect, but some people love trading at night – it’s like bargain hunting for the next day’s moves.
Cash Prices vs. Futures Prices: Why the Discrepancy?
Let’s talk about cash prices (the ones you see on the news) and futures prices (what spread betting companies use). Cash prices show how all the shares in an index (like the FTSE) are performing. But here’s the thing:
- Cash prices don’t update instantly when news breaks or during volatile markets.
- Futures markets, on the other hand, are quicker and are seen as the “real” price by spread betting companies.
This means the price you see for a spread bet might seem “off” compared to the cash price. But it’s not a rip-off – it’s just how the system works.
Key Insight: Futures markets are considered the “best” price by spread betting companies. They use these prices as a basis for their cash quotes, with a fair value adjustment for the cost of carry.
How to Keep Things Simple
If all this pricing talk is making your head spin, don’t worry. There’s an easier way to start: daily bets on individual stocks. Here’s why they’re awesome:
- The price is taken directly from the stock’s cash price (no funny business).
- The spreads are smaller than with quarterly bets.
- Perfect for quick trades since they expire at the end of the day.
Daily Bets vs. Rolling Cash Bets
Here’s the lowdown on the two main types of short-term bets:
Daily Bets
- They’re like “one-day only” trades.
- You can roll them over to the next day if you want, but the price will adjust for interest and dividends.
- No extra spreads when you roll them over.
Rolling Cash Bets
- These roll over automatically every night until you close the bet.
- Instead of including the cost of carry in the spread, you pay a small financing fee each day.
- They’re simpler to compare with the actual stock prices and usually have tighter spreads.
Takeaways: What You Need to Know
Spread betting can sound complicated, but it’s all about getting the hang of spreads and prices. Here’s your cheat sheet:
- Spreads Are Key: Compare them across different providers to get the best deal.
- Prices Depend on Futures: Don’t freak out if the spread bet price doesn’t match the cash price.
- Daily Bets Are Great for Starters: They’re simple, short-term, and less confusing.
Once you’ve got the basics down, you’ll start feeling more confident and ready to tackle more trades. Who knows, you might even enjoy speculating on markets after hours like a pro!
