Financial spread betting is an efficient way of getting involved with financial markets since it avoids income tax, stamp duty, commission costs, position sizing difficulties, and only requires a margin of your total investment.

Spread betting is a levered product allowing you to just put aside 10, 5, or even just 1% of your total trade to execute it. When you buy FTSE 100 at £1 per point with the index trading at 6,000, you are trading a £6,000 position. To do that you may be required to have at least £60, just 1% of the total position. It means that you are levered and are borrowing money. Spread betting providers are not charities, so they charge you a financing cost every day, usually stated as LIBOR + some spread. It may be LIBOR + 2.5% for example, or +3%. Let’s assume that this charge is 5% at current rates and that FTSE closes at 6,050 in the day. You will be charged 6,050 X 5% / 365, or £0.83 in financing for the day.

Spread betting companies differ in the way they charge this financing cost and how they carry your position overnight. In technical terms, they differ in the way they rollover your position. There are three main rollover possibilities:

1)    DAILY ROLLOVER WITH PRICE ADJUSTMENT: At the rollover time, which is defined by each provider, the company closes your position and re-opens a new one including a finance charge. Considering the above example in which FTSE is valued at 6,050 at the end of the day, your provider will close your position at 6,050 and charge you £0.83, but this value is not debited in your account. Instead the company opens a new position for you adjusted by this finance cost. Expressing £0.83 in terms of points would be to divide it by your £1 stake, that is 0.83 points. The new position is opened at 6,050.82. Next day, the same logic applies. Your position is closed every day and opened at a new price including a finance charge. This is what IG Index do (although they now offer daily traded funds that work similarly to what is stated in point 3)

2)    DAILY CASH ADJUSTMENT & DAILY ROLLOVER: At the rollover time, your provider closes your position and re-opens a new one but debits the financing cost directly in your account. In the above example, your position is closed and re-opened at 6,050 and your account funds will reflect a cost of £0.83. This is what Finspreads and City Index do.

3)    DAILY CASH ADJUSTMENT BUT NO ROLLOVER: The last possibility is keeping your position opened until you close it and debit your account for financing costs in a daily basis. This is what IG Index and Capital Spreads do and is certainly the best way to understand what really happens. IG Index calls this rollover method a “DFB” or “Daily Funding Bet”. If you hold positions for a few days, you can easily subtract close and open prices to exactly know your performance for that trade. In the other examples, you need to calculate daily profits and add them for all days. It is less intuitive.

No matter what method your provider chooses, the final result is always the same, so don’t worry much about that. The important is just to understand how things work.

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