Here are some of the frequently asked questions about spread betting on shares. For more information please take a look at our shares list.
How does spread betting on shares work?
Spread betting on shares is the tax-free† alternative to conventional shares trading. When you spread bet, you never physically buy or sell the shares, you simply bet – in terms of £ per point – on the direction in which you think the share price will move.
This means that you 'buy' if you think the price of a share (let's say Barclays) is set to rise, and 'sell' if you think the price will drop. If you bet £10 a point you will win £10 for each penny that Barclays moves in your favour. This is the equivalent of holding a position in 1000 Barclays shares; if the price went up one penny you would make 1000 shares x £0.01 price move = £10 profit. Similarly, betting £5 a point gives you exposure equivalent to 500 shares, £25 a point to 2500 shares, and so on.
The degree to which you are correct in your prediction, and the extent to which you bet, will dictate how much you win or lose.
For a better understanding of how spread betting on shares works take a look at our detailed examples.
How is spread betting different from conventional share dealing?
Apart from being tax-free†, the main difference is that shares spread betting is done on a leveraged basis. This means that for the same amount of money, you receive greater exposure to share prices than you would if you had to pay for the shares outright. Instead, to open your position you put up a deposit (a fraction of the contract value), which can be as low as 5%.
As shares spread betting is leveraged it can result in dramatic gains, but equally it can result in losses that exceed your initial deposit. Without good risk management it is possible to make significant losses over a short period of time, which is why we provide a number of risk management tools such as guaranteed stops.
What does 'short-selling' shares involve?
Short-selling is an expression which describes the process of a trader attempting to profit from the fall of an individual share price. To be successful the trader must first sell the share (open a position), at a higher price than they are able to buy it back later to close the position.
Short-selling is an option that used to be available only to institutional investors. However, with spread betting you can potentially profit from a falling share price as easily as from a rising one.
If you think the price of a particular share is set to fall, you simply 'sell' at our current quote, derived from the market price of the share. Provided that the share is borrowable in the underlying market, this will give you a 'short' position in your chosen share price, and you will be able to close that position by 'buying' at our quote later on.
What are the charges?
The main charge is the dealing spread. For DFBs on shares that are part of a major market index (like the FTSE® 100), this is 0.1% of the value of the transaction. There is also a daily adjustment that reflects the cost of financing your position, having only put down a fraction of the value as a deposit. For long positions financing is charged at the 1-month Libor rate plus 2.5% per annum.
Funding on short positions works in an opposite manner to long positions. Funding is credited to your account if the 1-month Libor rate is above 2.5%, or debited if the rate is below.
If you are short-selling there may be a daily charge for us borrowing the shares to sell short for the period the position is open.
Finally, we apply a charge for guaranteed stops. Non-guaranteed stops and trailing stops are free of charge. There are no other charges.
For further details, see our dealing spreads.
How are the deposits calculated?
Every bet involves a corresponding deposit. The deposit requirement for each bet is equal to the bet size multiplied by a deposit factor (which is listed for each share on the Excel file available from our shares list page).
Our deposits are based on liquidity, volatility and index requirements. The exchanges frequently change their deposit requirements, and therefore we reserve the right to change deposit requirements or require new or additional deposit payments without notice. For this reason, the deposit factors shown on our shares list may not be current when you open a bet. Any changes will normally apply to bets already open, as well as to new bets.
We also operate a tiered deposits structure, wherein the deposit rate increases when the aggregate size of your bet exceeds certain thresholds. For more information, visit our tiered deposits page.
Bets denominated in currencies other than sterling normally have a deposit requirement denominated in the relevant currency. In such cases you can, if you prefer, put up sterling; conversions will be made at an exchange rate no more than 0.3% less favourable to you than the current rate.
Placing a stop order on a particular bet can result in a substantial reduction in the deposit requirement. The deposit required for a controlled risk bet will normally be equal to the maximum amount you can lose on the bet.
When you have a non-guaranteed stop order to close a bet, the deposit requirement is equal to:
(bet size x stop distance) + (no-stop deposit x slippage factor)
The slippage factor for shares varies, from 30% upwards. You can find the slippage factors for individual shares in our trading platform, under 'Get info'. See the example below, or visit our risk management page for further details.
Our Barclays price on 28 April 2010 is 350.25-351.15. You think the price will fall, so you 'sell' £10/point at 350.25. The deposit factor for Barclays shares is 10%, so the deposit requirement for your bet would be:
£10 (bet size) x 350.25 (price) x 10% (deposit factor) = £350.25.
If betting with a non-guaranteed stop, the deposit is reduced. Using the above example, the deposit with no stop is £350.25. If a stop were placed 20 points away, the deposit would be calculated as follows:
20 (stop distance) x £10 (bet size) = £200
£350.25 (no-stop deposit) x 30% (slippage factor) = £105.08
£200 + £105.08 = £305.08
Why spread bet on shares with us?
- Greater choice including over 1300 UK shares plus thousands more international equities
- Tighter spreads thanks to our unique technology, which means we can offer you the tightest spreads available
- Guaranteed stops on over 6000 individual shares
- Tiered deposit rates means we can offer the most attractive rates on liquid stock positions
- Professional-level resources to help inform your dealing
- Real-time charting as part of a comprehensive technical analysis package
Learn more about spread betting with our free seminars.
Spread bets are leveraged products. Spread betting may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.