In order to start with spread betting, you need money, a strategy, and, of course, a spread betting account. Assuming you already have a plan and the money to execute it, you now need to choose a spread betting firm where you will be placing your bets. Choosing the right company is as important as having a good strategy, so don’t start trading with the first one you find. Take some time to evaluate several companies and to find the one that best fits into your needs.
Many features can make us prefer some spread betting provider, but I believe that there are three key points that stand out from the rest.
1. Product Offering
Spread betting companies like IG Index are usually offer the possibility to trade in commodities, currencies, indices, shares, and in some specialty markets, like housing prices, or electoral results. Although most of them offer you all these markets, some may have a larger offer of commodities, and others may give you broader access to equity markets. The offer will also vary from company to company in terms of betting types: futures style, daily, rolling daily, or binary bets. Each person has its own preferences and skills. Only you can know what are your particular ones. Some want to trade on major currencies, others prefer to place bets on FTSE 100 shares, and some others are more skilled to gold, oil, and wheat. Spend some time evaluating spread betting companies to find one that exactly offers what you are more comfortable trading. Do not trade on assets and products that you don’t really master just because they are available at your provider. That is the wrong way to start, and will certainly lead you to heavy losses. With so many spread betting firms around, I’m sure you will find what you want and master somewhere.
2. Bid-Ask Spread
Every traded product is quoted with a bid and an ask price. Let’s suppose you are planning to trade on FTSE100 index. You check the price and are quoted with 5940.8 – 5942.8. It means that you can buy the index at 5942.8 and sell it at the lower price of 5940.8. The 2-point difference is the spread and it is probably the most important part of spread betting. Tighter spreads improve your chances of making a profit. The bigger the spread, the more difficult it is to just breakeven. If you are holding shares for 5 years, it probably does not make much difference if you face a spread of 0.3% or 2%. But if you are a trader, looking for small movements of 5% or less, you certainly will need a lot of luck to show a profit in your books with a 2% spread. Spread betting is all about trading, and not a buy-and-hold investment strategy. You need to check spreads across companies, and choose the more favourable ones. You want tight spreads that you can overcome, otherwise you will only enrich your provider.
3. Overnight Rollover Costs
When you place spread bets, you are trading on margin and leveraging your money. To trade on FTSE100 you only need 1% of the money in most spread betting providers. It means that you can hold the equivalent to a long position of £100,000 with just £1,000. You are borrowing money, and you will be charged interest. Usually, the interest is presented in the form of the LIBOR rate plus a rollover fee. This fee can be 2%, 3%, or just 1.5%, depending on your provider. Let’s suppose you hold BP shares that you want to carry overnight. The closing price is 500p, the LIBOR 1M rate is 3%, and the rollover fee is 2.5%. Your provider will close your BP position at 500p and re-open it at a higher price to reflect the interest adjustment. The calculation for the new price is given by 500p X (1 + (3.0% + 2.5%)): 365 = 500.075. If you were betting £10 per point, you would be paying £0.75 in overnight costs. It may seem as just a little fee, but if you usually carry your positions overnight, it can be a significant cost. Just look at how much each provider charges and weight these costs with the other two points we saw, to choose the provider that best fits to your needs.
To conclude, I would like to restate that there are many important points that you should consider when opening a spread betting account like the software, deposit and withdrawal options, customer support, availability of phone betting, and maybe many particular specifications that affect each one of us. But, the product offering, the spread, and rollover costs, are the most important things that will certainly make the difference between showing a profit or a loss, and besides having a sound strategy and the money to implement it, those are the main points you should be looking at.
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