Essential Similarities between Spread Betting and Share Dealing

Posted By Robert On Tuesday, December 10th, 2013 With 0 Comments

Spread betting is different from traditional share dealing in the ways outlined above, yet it is also very similar.

Up-Shares, Down-Shares

Placing a “long” spread bet is pretty much the same as buying shares of a company. If the share price goes up then you make money, and if the share price goes down then you lose money. Whether you invest £1000 or spread bet £10-per-point on a 100p-per-share stock (which gives you exactly the same amount of risk) then…

  • If the share price doubles, you’ve made a £1000 profit.
  • If the company goes bust, you’ve lost £1000.

On a risk-reward basis it’s exactly the same thing, except that many newbie spread bettors come unstuck because they think that they are risking only £200 (if that is the required deposit) when they place the £1000-risk bet.

Spread Betting Pays Dividends!

Many first-time spread bettors who are lured into day trading commodities or foreign exchange (Forex) currency pairs don’t realise that they will receive dividend payouts on their longer-term equity and index bets just like a traditional stockholder would. The good news is that you receive the dividend adjustments in your spread betting account sooner than the regular stock-holders would; on the ex-dividend date rather than at a later payment date. The bad news is that you receive only 90% (and with some spread betting companies, 80%) of the dividend. At the time of writing Ayondo is one of the spread betting companies that pays 100% of dividends for UK shares, and 85% for US shares.

So with some minor differences aside, spread betting pays dividends just like traditional share dealing does. Here is an example of a dividend payment – which in this case is serving to offset some of the spread bet rolling charges – as you would see it on the IG platform:

Dividends and Spread Betting

Rival spread betting company IG provides a handy report, which details how the costs (in rolling charges) and dividend receipts have stacked up during the life of each trade.

Although you see your account credited with the amount of the dividend, do not be surprised if your overall account profit / loss figure does not change. As even traditional shareholders know, or should know: when a stock goes ex-dividend, the share price falls by the same amount to compensate for the money paid out to shareholders that is no longer on the company’s balance sheet.

Spread Betting vs. Share Dealing Cost Comparison

For an article I wrote some time ago I devised a spreadsheet to compare the costs of holding a spread bet position rather than a traditional share holding over various time periods and in various interest rate environments. With a particular set of assumptions – which I’ll discuss shortly – the spreadsheet looks like this:

It shows that for an investment (or equivalent spread bet size) of £10,000 or less held for a period 30 days or less, it is more cost-effective to hold the spread bet rather than the traditional investment – because the spread bet financing charges amount to less than the share dealing fees. For a small bet equivalent to a £100 “investment”, spread betting is more cost-effective than share dealing for as long as five years. These cases where “Spread Betting Wins” are shown in green (if you’re reading in colour).

Note that for a bigger investment of say £10,000 or more, held over three months or more, traditional share dealing becomes more cost-effective. However, if you have exactly £10,000 to “invest” then from a risk perspective you should consider spreading (no pun intended) the investment across ten separate £1,000 positions, in which case spread betting once again becomes more cost-effective.

Cost Comparison Assumptions

In devising the cost comparison spreadsheet I made several assumptions as follows:

  • Base interest rate (LIBOR) at 1%.
  • Spread betting company financing additional charge at 2.5%.
  • Extra bid-ask spread on spread bet markets vs. stockbroker offered shares of 0.2%.
  • Stamp Duty Reserve Tax (SDRT) on share purchases of 0.5%.
  • Share dealing fee on both purchase and sale of £10.

Well, interest rates change, and spread betting companies and stockbrokers change their fees. If we plug in a different set of assumptions we get a subtly different result, but the overall conclusion remains the same – that spread betting is more cost-effective than traditional share dealing when making smaller (or more diversified) “investments” over shorter timescales.

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