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Why are Tight Spreads Important When Spread Betting?

Financial spread betting comes with many costs. Not least the potential risk of large losses when trading a highly leveraged financial product. There are also costs such as overnight financing. Besides this, spread is one of the most important trading charges to consider.

What is spread?

Every time you place a spread bet, your spread betting broker will quote two prices, a buy price and a sell price based around the underlying market. Spread is the difference between the two prices. And the larger the spread, the more you pay to open and close every spread bet you place.

The UK 100, for example, is trading at a buy price of 6325.9 and a sell price of 6325.1. If you decide to spread bet UK 100 shares, the spread is 0.8 points (6325.9 – 6325.1 = 0.8).

You only start to profit, or incur losses, when the market value moves outside the spread. Assuming you decide to go long on the UK 100, your bet won’t open until the share value rises above 6325.9 points. If you opt to go short, your bet opens when the price drops below 6325.1 points.

If you close your trade at a loss or close it at a profit, the cost of the spread is always included in your trade. Spread is the provider’s charge for your spread bet. So in the example above, you decide to trade UK 100 shares for £10 a point. Whichever way the markets move, whenever you decide to enter and exit, you pay a spread of £10 (£5 on your opening trade, and £5 on your closing trade).

Not every broker offers the same spreads. When spread betting, brokers such as Core Spreads offer tight spreads.

How is spread calculated?

Spread is calculated by financial spread betting providers in a similar manner to brokers on the markets. Your provider examines data from exchanges across the world before it sets its prices, and factors in its desired profit from your trade. The nature of a particular market (its liquidity, volatility and perceived risk) is taken into account.

If a market has higher liquidity, you will generally be offered tighter spreads. Illiquid markets, with shares that are traded less frequently or in a lower volume will almost always have wider spreads. The size of a spread is seen as reflecting the level of risk involved in trading a particular instrument, and market makers set a wider spread to protect their trading in volatile markets.

In spread betting this is more simply the charge for your trade. To calculate the spread you are paying on a particular market, you need to know the stake per point you have placed and the size of the spread on the market you are trading. For example, if you traded the GBP-USD Spot with a spread of 0.9 points, and a stake of £10 per point, you would pay a spread of £9 (0.9 x £10).

Spread size doesn’t mirror the underlying markets and varies widely between different brokers. Because of this, tight spreads are one of the key factors you should consider before signing up with a spread betting broker.

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

 

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