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Posted By Robert On Wednesday, November 27th, 2013 With 0 Comments

Shares Spread Betting

When it comes to the stock market, there is more than one way to profit from the rise and fall of share prices. In some cases, there are better alternatives than conventional buying and selling.

What’s so great about spread betting?

Spread betting on stocks and shares offers a way for investors to make money in both a rising and falling market without having to shell out for any of the costs such as commission and stamp duty.

In an uncertain economic outlook picking the right company’s shares and being confident that they appreciate in value can be difficult. With gains stripped down to a minimum profits can be negligible, especially when costs are factored in. Spread betting allows investors to speculate on shares that will drop in value meaning that it is still possible to gain, even in a bear market.

Equities

I’m a big fan of trading individual equities in a spread betting account, for a number of reasons:

  • I understand individual companies and what they do.
  • It is more cost effective for me to trade in and out of individual equities in a spread betting account than in a traditional stockbroker share dealing account.
  • Any one of my individual equity holdings has the potential to become a ten-bagger whereas a stock index position (for example) is unlikely ever to appreciate by a factor of ten.

Perhaps the best reason for spread betting individual equities is the fact that the spread betting companies seem to want to steer us away from it. Have you ever noticed that when the spread betting companies offer some kind of sign-up bonus or other incentive, there is often a clause in the offer stating that “equity trades are excluded from this promotion”? To my mind, if someone is trying to dissuade you from doing something then it is probably a very good reason to be doing it! I also find spread betting on shares a less frenetic and volatile experience as opposed to immediately starting to deal in more exotic markets like the Dow or the price of oil.

At the time of writing, the widest range of national and international individual equities seems to be offered by IG closely followed by London Capital Group brands such as Capital Spreads.

You can have access to thousands of shares both on the UK and International exchanges with spread betting. Also the advantages of spread trading on shares are becoming increasingly apparent.

Here are a few examples:

Trade on leverage: buying shares through a traditional broker requires you to put up the full value, or 100% of the equity deal. Most providers offer competitive initial margin requirements, some as low as 5% of the share value or equivalent to 20 times leverage.

RISING MARKETS

OK, first let’s look at the obvious method of making money by ‘Buying’ at a low price, then ‘Selling’ the same shares at a higher price to make a profit.

Let’s take a look at a typical chart which shows the shares price over the last 3 months.

Risk Warning!

If the share price falls to your ‘Stop loss’ level you WILL lose all of the money you deposited to ‘Buy’ the shares.

To minimise the risk of losses – set your ‘Stop loss’ below previous low levels (which you can see on the share charts) or hedge for safety!

Now, say we watched the price rise to 300p and then fall to 243p, then we noticed it turn and climb back to 250p.  We think that the price will continue to rise towards 300p again over the next few weeks, so we place a trade to ‘Buy’ the stock.

1) We ‘Buy’ @ 250p for £1 per point (Each penny is a point).
2) We set our ‘stop loss’ @ 170p (Which is below the lowest price this share has fallen to, over the previous 6 months).
3) We watch the Price rise over the next 4 days and ‘Sell’ the shares @ 290p.
4) Profit from the trade = 290p – 250p = 40 points.

So, we made 40 x £1 = £40 profit.

As the stop loss was set at 170p, we had to place a deposit of 80 pts x £1

(250p  ‘Buy’ price – 170p ‘Stop Loss’)

So, we made £40 profit from an £80 deposit.

That’s a 50% return on investment in a week.

2 trades per month = 100% Return.

FALLING MARKETS

OK, now let’s look at the impossible sounding method of making money by ‘Selling’ at a high price, then ‘Buying’ the same shares back at a lower price to make a profit.

Again, let’s take a look at a typical chart which shows the shares price over the last 3 months.

(Each square = 1 week)

Risk Warning!

If the share price rises to your ‘Stop loss’ level you WILL lose all of the money you deposited to ‘Sell’ the shares.

To minimise the risk of losses – set your ‘Stop loss’ above previous high levels (which you can see on the share charts) or hedge for safety!

Now, say we watched the price rise to 310p and we think that the price will now fall towards 250p again over the next few weeks, so we place a trade to ‘Sell’ the stock. (Short Selling).

1) We ‘Sell’ @ 310p for £1 per point (Each penny is a point).
2) We set our ‘stop loss’ @ 390p (Which is above the highest price this share has risen to over the previous 6 months).
3) We watch the price fall over the next 3 days and ‘Buy’ the shares back @ 270p.
4) Profit from the trade = 310p – 270p = 40 points.

So, we made 40 x £1 = £40 profit.

As the stop loss was set at 390p, we had to place a deposit of 80 pts x £1

(390p  ‘Stop loss’ – 310p ‘Sell’ price)

So, we made £40 profit from an £80 deposit.

That’s a 50% return on investment in a week.

2 trades per month = 100% Return.

  • Profits are free from capital gains tax.*
  • There is no commission to pay (the only charge is our dealing spread) and stamp duty does not apply to spread bets on UK Equities.**
  • You can sell (go short) equities to open a position as well as buy them. This may be advantageous if you decide to hedge an underlying equity position or believe that certain equity is overvalued and want to take advantage of a potential fall in the share price.
  • The minimum bet size can start from as low as 50p per point in some cases (50p is the equivalent of just 50 shares).
  • You can execute your trades immediately on the live platform.
  • A Limited Risk Account has a free guaranteed stop facility so you do not have to worry about slippage or ‘gap’ fills.

*Tax laws are subject to change and may differ if you pay tax in a jurisdiction outside the UK.
**Stamp duty may apply to Irish and Greek stocks. Please call the provider’s for more information.

Bet per point

Shares trade on a bet per one point or one penny basis. A £5 bet is the equivalent of 500 shares. You can trade any share in £, $ or €. When a position is closed in a foreign currency any profit or loss will be converted to your base currency in your Cash balance.

UK shares: 1 Penny
European shares: 1 Euro cent
US shares: 1 US cent

Dealing Spreads

Providers add a dealing spread to the underlying market spread of the share that you are trading. It is calculated as a percentage of the current bid and offer of the underlying share. Market convention uses the term ‘basis points’ (bps) where 0.01% = 1 basis point. Below is a list of typical spreads.

Daily Rolling Bets
UK 100 shares: 0.10% (per side)
UK 100 non 100: from 0.20%
European shares: from 0.20%
US shares: from 0.20%

Please be aware that the underlying market spread may become volatile and widen significantly, especially at the open and end of a trading period.

Margin Requirement (MR)

MR for shares is calculated as percentage of the notional traded value of the share (percentage of stake x price).

Initial Margin Requirement (MR) %

UK 100 shares: 10%
Other UK shares from: 20%
European shares (main indexes): 10%
European shares (other): from 10%
US shares (main indexes): 10%

Please note that the MR on individual shares may change significantly depending on the volatility of each share.

Share Dealing Hours: Local Time
UK: 08:00 – 16:30
France: 09:00 – 17:30
Germany: 09:00 – 17:30
Netherlands: 09:00 – 17:30
USA: 09:30 – 16:00

Adjustments

If a market becomes subject to a corporate action or any other event that, as a result, would require an appropriate adjustment of a bet, the provider will make the necessary adjustment it believes to be fair, reasonable and to reflect the rights afforded to shareholders in the underlying market. If a client has a short position they should be aware that many rights or entitlements may be exercised against them if a stock is subject to a corporate action.

Example of a Rolling Bet:

You are interested in trading HSBC shares and ODL Markets quote the following spread:

HSBC Rolling SELL 898 – 900 BUY

You believe the stock is about to rise and decide to take an up bet and BUY £15 per point (or per penny) movement at 900p. This means that for every penny HSBC Rolling moves above 900p you will make £5, likewise for every penny it falls below 900p you subsequently lose £5.

HSBC shares settle at 4.30pm at 912p.

Note: Open profit and loss (P/L) is calculated as:

Opening level 900
Settlement Price 912
Difference 12
Open profit: 12 x £5 = £60

This is also referred to as ‘open marked to market’ or ‘unrealised’ P/L since you do not actually realise any profit or loss on a daily basis until you subsequently close a position.

You hold the above position with the provider overnight therefore the financing is calculated as:

Daily Financing

 

 

 

 

 

 

 

 

 

 

Dividends

Dividend payments from individual stocks occur on a regular basis and may have a material effect on your trading account if you hold a rolling bet in the relevant equity.

If you hold a rolling position and the instrument goes ex-dividend we will simply credit or debit your account with the dividend amount.

Payment of dividends

UK shares for long and short positions

If you hold a long (buy) spread bet position we will credit your account 90% of the gross dividend.

If you hold a short (sell) position we will debit 90% of the gross dividend.

For example, a client holds a (+ / -) £10 of rolling Barclays. Barclays goes ex-div with a declared dividend of 7.5p.

The client who bought £10 a point would receive £10 x 7.5 x 90% = £67.50.

The client who was short £10 a point would be debited with £67.5 (£10 x 7.5 x 90%).

All payment transactions will be reflected in ‘Cash History’ on the platform.

European and US and other stocks

If you hold a long position we will credit you 85% of the gross dividend.

If you hold a short position we will debit 100% of the gross dividend.

Dividend adjustments on Index rolling bets

If the stock that goes ex-div has a large enough weighting in an index it can have a material impact on the price of that index.

For example:

BP has a large weighting in the UK 100 Index. BP goes ex-dividend by 6p which has a material impact on the UK 100 index of 7 index points. Therefore, on the ex-dividend day BP’s share price will fall by 6p and the UK 100 index will fall by 7 points.

A client who has a £20 long position when the UK 100 goes ex-div will receive £140 (£20 x 7 x 100%).

A client who has a £15 short position when the UK 100 goes ex-div will pay £105 (£15 x 7 x 100%).

 

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