Spread betting profits are free from tax.
Financial spread betting through WorldSpreads means no trading commissions and no management fees. If you decide to open a Limited Risk Account they won’t even charge you for your guaranteed stop orders.
There are a couple of costs involved.
The cost of the dealing spread
The most obvious trading cost is the cost of the dealing spread. The dealing spread is simply the point difference between the price at which you can buy an asset from a broker and the price at which you can sell it back to the same broker. When you multiply this point difference by your stake, this will be the cost of the spread.
Example:
The UK 100 Daily Rolling Future is quoted at 6000-6001 therefore the ‘Spread’ is 1 point.
You decide to place a buy bet at 6001 with a stake of £20 per point.
The market remains static and so you decide to place a £20 sell bet at the quoted sale price of 6000 in order to close the original opening trade.
Cost of Spread Calculation
Point difference between Buy price and Sell price x Stake (£'s per Point) = Cost of Spread
1 point x £20 = £20
Therefore the smaller or ‘tighter’ the spread the lower the cost of trading. To help with this WorldSpreads offer Zero Spreads on 10 popular instruments to reduce the cost of spread trading.
Overnight rolling charges
The other charge you may incur when financial spread betting is an overnight rolling cost. This is sometimes referred to as ‘financing’ and usually consists of an interest charge being applied to the value of the position. This charge is based on you spread betting on margin - the placing of a smaller down payment to control a larger sum. The overnight charge represents a fee, payable to the spread betting provider, in return for funding the majority of your position.
For each day the bet rolls over a financing charge is made to your account, which is normally 2.5% above LIBOR fixing. LIBOR is the London Interbank Offered Rate – a daily reference rate based on the interest rates and which banks borrow unsecured funds from other banks in the London wholesale money market.*
Example:
You have bought the UK100 - Daily Rolling Cash with a view that the price of the index will rise over the next few days. Your initial buy price was 6001 and your stake was £20.
For each night that you hold this position open the rolling charge would be:
Value of Position = Stake x Price
Interest Rate = LIBOR + Worldspreads Haircut 2.5%
Daily Factor = Number of days / 365
Rolling Charge = Value of Position x Interest Rate x Daily Factor
Value of Position = (£120,020 = £20 x 6,001)
Interest Rate = 3.1% (0.6% LIBOR + 2.5% Haircut )
Daily Factor = 0.0027 = (1 day held / 365)
Rolling Charge = £10.05 (£102,020 x 3.1% x 0.0027)
If you had bought the UK 100 – Daily Rolling Future, your rollover charge would instead be based upon the stake rather than the value of the position, and this is because that futures positions have already had the ‘cost of carry’ (Interest Rate x Daily Factor) priced into them.
Spread betting providers may charge a point or more each night to rollover these positions and therefore in this instance, the charge you would have incurred to roll this position would be £20 (stake x one point).
Before you open a position you need to consider the length of time you may keep the position open and then choose the most cost effective option, both in terms of spread and overnight charges.