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Why are Tight Spreads Important When Spread Betting?

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Why are Tight Spreads Important When Spread Betting?

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Spread betting the financial markets can be a costly endeavour. Trading a highly geared financial product carries a potential of losses in excess of your initial investment. In addition to this, one of the largest transaction costs for any trader will often be spread.

What is spread?

When you spread bet, your financial spread betting broker will give you a bid and an offer price based around data from the markets. The difference between these two prices is called the spread. If the spread is larger, you will have to pay more every time you enter and exit a spread bet.

For instance, the UK 100 index is currently priced at 6324.3-6325.1. This means that the spread on the UK 100 index is 0.8 points (6325.1 minus 6325.9 = 0.8).

You will only make a profit, or take a hit, once the price moves outside the spread. If you bought on the UK 100 example above, you wouldn’t start to make a profit until the market value goes above 6325.1. If you decided to sell, the trade would only really open once the markets fall beneath the 6325.1 mark.

Whichever way you close the trade, going long or going short, making a profit or incurring a loss, the spread cost is an overhead in your trading. Most spread betting brokers make their money from the spread cost. In the above example, if you staked £100 a point on the UK 100 that would equal an £80 spread cost. That’s 0.8 spread multiplied by your stake of £100.

The crucial takeaway is that spread cost differs wildly between different brokers. Trading with a financial spread betting broker like Core Spreads offers tight spreads and, barring potential losses, keeps trading costs low.

How is spread calculated?

Spread betting brokers figure out the spreads they offer in a manner akin to brokers in the traditional markets. Whether a specific instrument has higher volatility, liquidity or is seen to be more risky contributes to the size of the spread.

Instruments with a lower volume of trade will usually have wider spreads because this makes them more volatile. In market with an increased liquidity, spread betting brokers will normally offer tighter spreads. The size of a spread helps to protect market makers trading in instruments with more volatile price movements.

When spread betting, the size of the spread is the charge you pay to open and close a trade. The spread cost is simply your stake for a trade multiplied by the spread size. So if you placed a £100 per point trade on the UK 100 with a spread of 0.8 points, you would pay £80 (£100 x 0.8) in spread simply to carry out your trade.

Spread cost adds up over time and barring losses can be one of the highest costs of financial spread betting.  Not every broker offers the same spreads so choosing one with tight spreads is essential when picking who to trade with.

Risk warning: spread bets and CFD trades are leveraged products. Losses may exceed deposits.

Andy McGowan
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