True cost of a spread bet?

THENOX

Thanks for the answer! I hope that barrooo will have his say as well especially relating what you've said about costs to where these costs come from: primary + secondary spread?

Biggles

To be honest, Nox, the sums differ with every market. As you seem to be starting from Square 1, the best way is to examine the market you're interested in, and then to examine the corresponding spread or CFD market with each firm.

You will then get an idea of how they relate to each other.

THENOX

Looks like it's me once again trying to do things the other way round -as usual... :mad:

barrooo

All spread bets and CFD are derivatives based on the underlying market. I'll run through a quick example and hopefully that'll make things clearer.

FTSE 100 actual market price = 5350
Spreadbet quote is 5349/5351

This means the broker will buy/sell at market price and you will buy/sell at the quoted price that spread between what the market is and what you buy/sell for is essentially the brokers commission.

So the first number is the sell price and the second is the buy price, so say for example you think the market will go up, you buy at 5351, for £1/point, therefore instantly you're £2 down as the sell price is 2 points lower, but obviously you hope the market goes up and will be able to sell at a higher price as the spreadbet quote mirrors the market.

As for financing with the above example, what you've essentially done, when going for £1/point is buy roughly £5351 of FTSE100, now to open that bet the broker will require a margin (a percentage of the money invested in the market) this will differ from broker to broker.
Lets say to go for £1/point will require £150 margin, now if you keep that bet open overnight, the money outstanding i.e money invested minus the margin, will need to be financed, this is calculated using the LIBOR rate with a bit added on top for the broker, with the current LIBOR rate it would work out to be about 90p per night.

You can also get loads of actual example with figures worked out properly, just look up some brokers on the interweb

THENOX

Thanks 4 this!


And my other question is: ('ve read this in CFD leaflet while on reconnaissance): "da da da, margined trades therefore the financing charge will be applied cause you are effectively borrowing money to finance the purchase. THE OPPOSITE OCCURS WHEN YOU SELL SHORT A CFD, WHERE INTEREST IS RECEIVABLE."
-? :T too good to be true! :mad:


Any ideas?

PS: And found that some CDFs have spreads as well (probably double: broker + underlying spread), exactly like in SB -redicilous! :mad:

THX,


THE NOX

---

The four most dangerous words in investing are, It's different this time...
Sir John Templeton

---

Biggles

All CFDs have spreads, just like spread bets. And there is indeed interest payable when you are short, as part of the CFD financing arrangements, but it's at a very low rate, so I shouldn't get too excited about it.

But Barroo was confusing SBs & CFDs. There is no daily financing payable on SBs. The financing is paid by means of the pricing of the bet.

Thus a bet on the Aug FTSE100, which presently stands at 5454, is priced at 5468-5479. And a bet on the Sep FTSE100 is priced at 5475-5485 and Dec 5513-5523 and so on. So, the longer you hold the bet, the more you pay. With individual shares, this will vary to take account of dividends due etc.

THENOX

What's the logic of them paying interest if you go short if you still use margined trade with borrowed money?

BTW: why these quotes for FTSE have the same spread of 10 points but the values go down? -Do they have futuristic vision? :cool:

Biggles

Because you've 'sold' the instrument. Thus, in a way, they owe you money till you close the bet by 'buying' it back.

I'm afraid I don't follow the second question.

barrooo

You do pay financing overnight if you SB on the spot market, however not on futures, like I say depends on timescale of trading which suits you better

THENOX

Thus a bet on the Aug FTSE100, which presently stands at 5454, is priced at 5468-5479. And a bet on the Sep FTSE100 is priced at 5475-5485 and Dec 5513-5523 and so on. So, the longer you hold the bet, the more you pay. With individual shares, this will vary to take account of dividends due etc.

Numbers in this example retain 10 point spread but the further bet Aug/Sep/Dec the lower value.

Therefore my question: "why these quotes for FTSE have the same spread of 10 points but the values go down? -Do they have futuristic vision? :cool:"