Financial spread gambling is an efficient method of getting involved with money markets since it avoids income tax, stamp duty, commission costs, position sizing problems, and only requires a margin of your total investment.
Spread betting is a levered product allowing you to just set aside 10, 5, or maybe just 1% of your total trade to execute it. When you buy FTSE 100 at ?1 per point with the index trading at 6,000, you are trading a ?6,000 position. To do that you could be needed to have at least ?60, just 1% of the total position. It means that you are levered and are getting a loan. Spread betting suppliers aren't charities, so they charge you a financing cost each day, sometimes stated as LIBOR + some spread. It could be LIBOR + 2.5% as an example, or +3%. Let's assume this charge is 5% at current rates and that FTSE closes at 6,050 in the day. You'll be charged 6,050 X 5%/365, or ?0.83 in financing for the day.
Spread betting firms differ in the way they charge this financing cost and how they carry your position overnite. In technical terms, they differ in the way they rollover your position. There are 3 main rollover possibilities:
1) DAILY ROLLOVER WITH PRICE ADJUSTMENT: At the rollover time, which is defined by each supplier, the company closes your position and re-opens a new one including a finance charge. Considering the example above in which FTSE is priced at 6,050 at the end of the day, your provider will close your position at 6,050 and charge you ?0.83, but this value isn't debited in your account. Instead the company opens a new position for you altered by this finance cost. Expressing ?0.83 in terms of points is to divide it by your ?1 stake, that is 0.83 points. The new position is opened at 6,050.82. Next day, the same logic applies. Your position is closed every day and opened at a new price including a finance charge. This is what IG Index do (though they now offer daily traded funds that work likewise to what's stated in point 3)
2) DAILY Money ADJUSTMENT & DAILY ROLLOVER: At the rollover time, your provider closes your position and re-opens a newer one but debits the financing cost straight in your account. In the above example, your position is closed and re-opened at 6,050 and your account funds will reflect a price of ?0.83. This is what Finspreads and City Index do.
3) DAILY Money Adjustment BUT NO ROLLOVER: The last possibility is keeping your position opened until you close it and debit your account for financing costs in a regular basis. This is what IG Index and Capital Spreads do and is undeniably the simplest way to appreciate what actually happens. IG Index calls this rollover system a "DFB" or "Daily Funding Bet". If you hold positions for a couple of days, you can simply subtract close and open costs to exactly know your performance for that trade. In the other examples, you want to calculate daily profits and add them for all days. It is less intuitive.
Regardless of what strategy your supplier selects, the final result's always the same, so don't worry much about that. The crucial is solely to know how things work.
Spread betting is a levered product allowing you to just set aside 10, 5, or maybe just 1% of your total trade to execute it. When you buy FTSE 100 at ?1 per point with the index trading at 6,000, you are trading a ?6,000 position. To do that you could be needed to have at least ?60, just 1% of the total position. It means that you are levered and are getting a loan. Spread betting suppliers aren't charities, so they charge you a financing cost each day, sometimes stated as LIBOR + some spread. It could be LIBOR + 2.5% as an example, or +3%. Let's assume this charge is 5% at current rates and that FTSE closes at 6,050 in the day. You'll be charged 6,050 X 5%/365, or ?0.83 in financing for the day.
Spread betting firms differ in the way they charge this financing cost and how they carry your position overnite. In technical terms, they differ in the way they rollover your position. There are 3 main rollover possibilities:
1) DAILY ROLLOVER WITH PRICE ADJUSTMENT: At the rollover time, which is defined by each supplier, the company closes your position and re-opens a new one including a finance charge. Considering the example above in which FTSE is priced at 6,050 at the end of the day, your provider will close your position at 6,050 and charge you ?0.83, but this value isn't debited in your account. Instead the company opens a new position for you altered by this finance cost. Expressing ?0.83 in terms of points is to divide it by your ?1 stake, that is 0.83 points. The new position is opened at 6,050.82. Next day, the same logic applies. Your position is closed every day and opened at a new price including a finance charge. This is what IG Index do (though they now offer daily traded funds that work likewise to what's stated in point 3)
2) DAILY Money ADJUSTMENT & DAILY ROLLOVER: At the rollover time, your provider closes your position and re-opens a newer one but debits the financing cost straight in your account. In the above example, your position is closed and re-opened at 6,050 and your account funds will reflect a price of ?0.83. This is what Finspreads and City Index do.
3) DAILY Money Adjustment BUT NO ROLLOVER: The last possibility is keeping your position opened until you close it and debit your account for financing costs in a regular basis. This is what IG Index and Capital Spreads do and is undeniably the simplest way to appreciate what actually happens. IG Index calls this rollover system a "DFB" or "Daily Funding Bet". If you hold positions for a couple of days, you can simply subtract close and open costs to exactly know your performance for that trade. In the other examples, you want to calculate daily profits and add them for all days. It is less intuitive.
Regardless of what strategy your supplier selects, the final result's always the same, so don't worry much about that. The crucial is solely to know how things work.
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