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Spreads and Commission
You’ll hear the term the spread a lot during this course and as you trade. The spread of any market is the difference between the sell (bid) price and the buy (ask) price. The tighter the spread, the easier it will be to profit if the market moves in your favour. Let’s say a market trades at 49p – 51p and you buy at the ask (51p). To breakeven you’ll need the bid (49p) to rise 2p. Now let’s say a different market trades at 45p – 55p. Now it will take a 10p swing for you to breakeven.
Given it’s so important, you might be wondering what affects the spread? That would be the market’s liquidity, which is simply the ease with which it can be traded in the market. Typically, the higher the current volume of trades on a market, the narrower the spread.
Spread Betting
When spread betting, the only cost for entering and exiting a trade is the spread.
For shares, the spread is made up of two components: market spread and Spreadex spread. Market spread is the difference between the bid and ask in the underlying market and is mainly driven by liquidity. The Spreadex spread is essentially a commission charge. Let’s say ABC corp trades in the underlying market at 98 – 102. It may then be offered on the Spreadex platform at 97 – 103. The total spread here is 6 points, of which 4 is market spread and 2 is Spreadex spread. If you see the spread changing intraday on the platform, that will be because the market spread is changing.
For non-shares markets such as stock indices, commodities and FX, the spread is essentially chosen by Spreadex whilst factoring in market spread. Sometimes this can lead to Spreadex offering an even tighter spread than the market! A good example of this is the Dax where Spreadex offers spreads as tight as 1.4pts. Please note that these spreads can be variable and so during times of lower liquidity in the underlying market, the spread may widen.
CFD Trading
When CFD trading on shares, there are two costs for entering and exiting a trade: spread and commission. This time spread refers to market spread only. In addition to market spread, you will pay commission which will be applied as a cash debit on the account. You might be thinking is it cheaper to trade CFDs or spread bet? The fees are the same and the only difference is how they’re charged. The commission charge with CFDs should equate to the Spreadex spread with spread bets.
For non-shares markets such as stock indices, commodities and FX, the only charge for entering and exiting a position is the spread. Like with spread betting, no other commission charges will be debited from your account.
You can find information on our spreads for all the financial markets we offer here.
Financing Costs
Another factor to consider is financing costs, often referred to as 'overnight financing charges'. These charges are incurred if you hold a rolling, daily or spot position overnight. They can be either positive or negative, depending on the direction of your trade and the prevailing interest rate. Financing costs can add up over time and impact your overall returns, so it's essential to be aware of them when planning your trading strategy!
Funding Charges for a Shares Rolling Position
If you hold a rolling position through the close of the relevant exchange (16:30 for UK Shares), the trade will be kept open for the following day's trading and a funding adjustment will be applied to your account. Funding is essentially the cost of using leverage – the fact you only have to put down a fraction of the full trade value.
The funding charge is based on the Adjusted ARR + a Spreadex charge. More information on adjusted ARRs can be found but they are essentially relevant interest rates. For FTSE 350 stocks, we use the 30-day Sonia interest rate and the Spreadex charge is 3%. Therefore, if the Adjusted ARR was 0.5%, the total daily funding charge for a long position held overnight would be (0.5% + 3%) / 365 = 0.0096% of the position’s value.
Let’s say you hold a long (buy) position in Barclays of £50 and it closes the day at 200p, your funding charge for the night would be (50x200) x 0.0096% = £0.96.
So what happens if you are short? Well, the 3% charge is subtracted from the Adjusted ARR rate. Unlike long positions, the total funding adjustment on short positions can result in either a positive or negative funding adjustment. If the Adjusted ARR is greater than the 3% charge, the funding adjustment will be positive and credited to your account. If the Adjusted ARR is less than the 3% charge, the funding adjustment will be negative and debited from your account.
Now let’s say you hold a short position in Barclays of £50 and it closes the day at 200p. If the Adjusted ARR was 5%, you would be credited funding for the night of (50 x 200) x ((5% - 3%) / 365) = £0.55.
Please note that funding is trebled on a Friday afternoon to account for holding a trade over the weekend and bank holidays will be similarly charged.
You can find information on how we calculate funding for all our markets here. Simply click ‘Read More’ on the instrument you wish to find information on, scroll down and click ‘Find Out More’ on the type of product you are interested in.
The Cost of Rolling a Futures Trade
Rolling a Futures Trade
There is no charge for holding a future overnight, instead financing fees are factored into the price. If you would like to keep your exposure past the expiry of the relevant instrument, then you can set the position to roll automatically via your trade preferences. What does it mean to roll your position? Your position will be closed in the expiring contract and new position will be opened in the next available future of the relevant market.
The cost of rolling a futures trade is the spread. For non-shares markets like stock indices, commodities and FX, your position in the expiring contract will be closed at the sell price (bid) and opened at the buy price (ask) of the next available future. Remember that for shares, the spread is made up of two components: market spread and Spreadex spread. The good news is that when rolling a shares future, the only cost is the Spreadex spread – i.e., no market spread is incurred.
For more information on Futures vs Rolling trades for shares simply click on the link. Click here for further information on Futures vs Daily & Spot trades for indices.
Short Borrow
One of the big advantages of spread bet and CFD trading is that you can profit from a falling market if you predict it correctly. To do this you can go short (sell) a market. When it comes to trading shares, there is a fee associated with going short and we call this a short borrow charge. To understand the charge, you first must understand the process of going short.
When you go short a stock, you are essentially borrowing shares from its owner. You then sell these shares in the market and hope the price goes down. When you’re ready to close the trade, you buy back the shares (hopefully at a lower price) and return them to the owner.
So, to sell shares you don’t own you must borrow them. Borrowing shares incurs a daily fee known as a short borrow charge. For stocks that are borrowable in the underlying market, the borrowing charge with Spreadex is the rate in the underlying market. If the stock isn't available for borrowing in the underlying market, we may still let you place a bet. However, this borrowing cost is going to be higher - typically around 10% of the stock value per year.
If you’d like to know the applicable short borrow charge before opening a short on a stock, get in touch with our dealing desk who can advise on the applicable rate. Do note that these charges can change depending on the availability of borrow in the underlying market.
