Spread Betting is cheaper than holding shares!

cepheus

WARNING THIS POST REFERS ONLY TO TAKING AN EQUIVALENT SPREAD BETTING POSITION TO THAT IN THE UNDERLYING EQUITY MARKET. TAKING A POSITION GREATER OR OF A DIFFERENT NATURE TO THOSE INDICATED IN THE SPREADSHEET COULD LEAD TO MUCH GREATER GAINS OR LOSSES THAN POSSIBE WITH SHARE TRADING.

I wish to challenge the myth that spread betting is any different or dangerous than equity investing providing you carry out the equivalent trade. Moreover, it is cheaper even for long term holders of equities in the present low interest rate environment and far cheaper for smaller, more frequent traders and almost anyone who pays income or capital gains tax on their portfolio, or ISA fees.

Note this applies to rolling spread bets only .

The cost of a spread bet or equity trade transaction can be split into two components.

First there is the rolling or time component.

In spread betting when you buy a certain number of £s/point (in a long or bought position) you are effectively in financial terms buying the security with what is mostly borrowed money. The interest on this is charged at typically LIBOR+2.5% or 3% a year at present rates. However what people don't allow for is that the money not used, which would normally be required for the same exposure to an equity investment can be invested in a safe bond or bank account. And this effectively makes the cost of borrowing neutral or slightly profitable!

Secondly there is the fixed component. When trading shares you are charged 0.5% stamp duty on sales plus the commission twice, once for buying and once for selling. For a round trade on spread betting (to buy then sell) the additional spread on a spread bet might be typically 0.2%. So this amounts to at least a gain of 0.3%.

Add these two components together and you should find that spread betting is more profitable for most equity traders and investors. The only exception is for large infrequent investors during periods when LIBOR rates approach or exceed savings rates.

Have a play with the following spreadsheet but please check the calculations before using it for real, and tell me if you spot any mistakes.

The size of the average round trade is in blue and the number of round trades per year is in purple. The saving using spread betting over equivalent share trading is in red, with the bold values indicating a one turnover of the entire portfolio. Remember to fill out the size of the equivalent share account and any other changes from the default values in green.

Bear in mind that profits and losses in spread-betting are tax free, so strictly speaking you should be comparing this with an ISA account some of which attract fees! As far as I know all spread-betting accounts are free, sometimes much cheaper to phone (my friend spends £400/year on mobile 0845 numbers to Barclays!), have free alerts and automatic trading as well as more.

Warning, this still will only minimize costs, not guarantee profits, without a tried and tested strategy and a tough mental attitude (at least). Spread betting will also allow you the potential to bet more than you can afford due to the borrowing element, so it not for the wreckless.

Always convert to the equivalent share value to find your exposure (see the second table).

Damn lost my commission now!

sabretoothtigger

It does compare favourable especially on small trade sizes where share dealing has higher percentage costs.

If someone was buying 10k of shares and was going to hold a year or more I'd say stick to shares.

Last time I checked my rough costs on a spreadbet it was about 6% apr so if I buy BP at 471p that is me borrowing £471 and if I kept the trade open a year I'd expect to pay about 6 pence a day. Plus they add on about a penny to the spread so thats a cost of 1 pound also to buy

manrow

I presume from your response, if I don't want to trade 10K shares, nor hold for a year, then spreadbetting is a better option?

Ark_Welder

Spread betting is just that - gambling, not investing. A geared play on an asset, potentially unlimited losses, only 1 in 5 gamblers make money.

The Times: Ten things to know about spread betting
The Times: Spread-betting fails investors in trouble

FSA: Thematic communication on spread betting

cepheus

Sabretoothtiger, the Default levels in the spreadsheet are about right for the current situation, about 3% interest.

However, if you invest the equivalent money which you would need to buy equities direct in a savings account it shouldn't cost you anything overall. This is the main point I was trying to get across!

Manrow do view the table, Can I print it out here directly?

Ark Welder you are missing the point, please read the OP. That Sunday Times article is nonsense, buying a share and spread betting can be the same financially. I know someone who trades shares but whatever he does, he would be about 2k better off spread betting doing exactly the same.

It is NOT spread betting which is gambling, it is excessive trading and poor judgement and money management, whether it is shares or long positions in spreads.

sabretoothtigger

It compares well on small trades. On larger trades its not so competitive to a good broker except for the tax free bit

Of course there is lending money part but I would exclude that as a benefit as its not free but its definitely more convenient.



Thats 0.5% stamp duty cost and £10 so about £60 total

The spreadbet company adds about 1% to spread costs I think. I'll have to verify or compare this during trading hours tomorrow but on 10k thats £100 extra cost.
The cost to borrow 10k overnight is about 1 pound.

Its the spread where they make the real money and the fact I cant easily show it right now highlights thats its a more easily hidden cost and for them, profit


Its not gambling but it is a step closer to gambling then normal shares because borrowing money can make people careless. Theres a whole forum section here for bad debt situations, its hard to be careful

Ark_Welder

...and no income distributions.

The Gambling Commission...

"2. The Commission and local licensing authorities are responsible for licensing and regulating all gambling in Great Britain other than the National Lottery and spread betting, which are the responsibility of the National Lottery Commission and the Financial Services Authority (FSA) respectively."

cepheus

On long rolling bets dividends are paid just the same as if the share was held.

JamesU

manrow wrote: »

I presume from your response, if I don't want to trade 10K shares, nor hold for a year, then spreadbetting is a better option?

ManRow, might be useful to have a look at the data in the link below which has almost the same input variables (Libor slightly higher) to Cepheus's posted data. Need to differentiate between savings made on a given investment size (spreadbetting/share dealing) depending on number of round trades per year (Cepheus's data) and savings made on a given investment size over the varying time the investment is held (Sabre's point and see the data in link below).

For example, in the link below if a £10K investment is held for 1mth spreadbetting more cost-effective, holding for longer than 3mths and longer, share dealing would be more beneficial.

https://spreadsheets.google.com/ccc?key=0AqmSKN_6SGtqdGo1bzZoUnZucG5KZ1NmY24xWlhNWkE&hl=en&authkey=CIH899UN#gid=0

Cepheus, interesting post. But I am struggling to equate and understand the figures in your data with the data in the link above. Might be useful to break down a single calculation say the £10K investment over the first year and then added interest to see how the two sets of data compare?

JamesU

Ark_Welder

cepheus wrote: »

On long rolling bets dividends are paid just the same as if the share was held.

Acutally, they're not. Most spread betting firms withhold up to 20% from the 'dividend' as 'tax'. so possibly 10% less than from holding the shares directly.

On short rolling bets the gambler has to PAY the dividends, i.e. deducted from their bet.

Capital Spread's Risk Warning for those who may believe that spread betting may be any 'different or dangerous to equity investing'

"For many members of the public, these Transactions are not suitable."

"The high degree of "gearing" or "leverage" is a particular feature of this type of Transaction....If the underlying market movement is in your favour, you may achieve a good profit, but an equally small adverse market movement can not only quickly result in the loss of your entire deposit, but may also expose you to a large additional loss over and above your initial deposit. "

"You may be called upon to deposit substantial additional margin, at short notice, to maintain your position"

"Under certain trading conditions it may be difficult or impossible to liquidate a Position."

"Gapping (or Slippage) refers to an occurrence whereby the market moves past a Stop Loss level.....Where this happens a Stop Loss may not be effective and the Position will be closed at the current LCG Quote."

As with anything, read the smallprint. Don't allow 'Tax free' to be a deciding factor.

JamesU

Ark_Welder wrote: »

"For many members of the public, these Transactions are not suitable."

"The high degree of "gearing" or "leverage" is a particular feature of this type of Transaction....If the underlying market movement is in your favour, you may achieve a good profit, but an equally small adverse market movement can not only quickly result in the loss of your entire deposit, but may also expose you to a large additional loss over and above your initial deposit.

I think you are missing the point of Cepheus's thread which is about carrying out equivalent trades (spreadbetting vs share dealing) and evaluating cost advantages between the two, which is quite interesting to discuss. The thread is not about higher risk leveraged spreadbetting.

JamesU