Spread Betting Financing Charges Explained
Whilst it is more than possible to whip in and out of the financial betting market in less than a day, some traders opt to roll their bets over to maximise their chances of getting a good return. This can be a good strategy, but extending the term of the bet can involve financing charges and these need to be taken into account when calculating potential gains or losses.
The Cost of Trading Overnight
Financial bets that are opened and closed on the same day do not attract a finance charge and all of the commission payment is included in the spread. However, if you opt to hold your position overnight, if you have gone long, you are effectively ‘borrowing’ money from your broker and they charge you for the privilege.
For a financial bet that is being rolled over daily, the charge will be applied for every overnight session you opt to hold your position. For long positions you will face a debit, but if you have gone short, your account will actually be credited. There are some exceptions to this rule; if LIBOR is running at a particularly low level, the finance debit will apply to both long and short positions.
The exception to the rolling charges is for quarterly bets; these already have the fees for rolling over incorporated. Why not simply plump for a quarterly bet and just close out whenever you want, you may ask yourself? Unfortunately, the spreads are far tighter on a daily bet compared to the quarterlies, so it’s a case of balancing the charges against the gain and calculating which way you would be better off.
How it’s Worked Out
In financial betting, daily finance costs are usually around 2.5-3%, so if you plan to roll over your position regularly it’s important to factor in the charge. Some providers have a minimum fee, depending on the market being traded.
The rollover charge is calculated by adding the rate from the broker to LIBOR and applying this percentage to the final price your investment closed at and then dividing by 365. This figure is then calculated against your stake to get your daily cost. Conversely, if you had opted to go short the same formula would apply in order to work out what would be credited to your trade. We address some common questions regarding spread betting financing charges here.
Bookmakers love a roll over
Financial betting has the advantage over other similar types of trading such as contracts for difference and futures because the Financial Conduct Authority, whilst regulating the activity, consider it to be technically gambling and therefore allow individuals to keep any profits without deducting Capital Gains Tax or stamp duty. However, the daily finance costs of holding a position open for too long can wipe out the tax benefits, so it is important to ensure you know how much you will pay for longer term trades.
If you plan on holding your position for a substantial period of time, an alternative approach to minimise the amount of money you have to cough up in charges may be better, unless you are very fond of your bookmaker and don’t mind them taking an increasing chunk of your earnings… In this respect I like Ayondo because they charge financing fees at 2.5% only on the amount you actually borrow from them and not on the full market position. So, say if you open a trade for £5,000 and put up £1,000 as margin to open the trade and leave the position overnight, Ayondo will only charge you interest based on the net £4,000 difference and not the full £5,000 [this is unlike what mostly happens with other brokers who charge you on the full position amount].
Finance costs may not sound like a lot when you look at the percentages but for large positions that are going to be rolled over repeatedly, the charges can quickly mount up. This doesn’t mean that all bets should be restricted to within a day, but it is worth keeping an eye on both sides of the scale when weighing up whether to roll over or hold a position.
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