Costs vary widely and some firms suit novices better
THE spread-betting market has become increasingly saturated, but greater competition has led to lower dealing costs, new and innovative technology, and crucially a tightening of spreads. Given these better offerings, now might be a good time to consider what you should be demanding from your provider.
MAKING THE COMPARISON
A spread-bet is a bet on the future movement of an underlying instrument and, unlike share trading, you can benefit from falling as well as rising prices. Costs are priced into the spread (the difference between the buy and sell price for a particular bet). Effectively, the wider the spread, the more expensive it is to trade, although some spread bet markets will charge a small financing fee.
Spreads differ from one provider to another more than you might think. Many offer a one point spread on popular indices, for example, while other providers charge slightly more. But make sure you account for overnight financing charges – they quickly stack up. And the spreads offered within a company will also change depending on the product and the time of day you want to trade. ETX Capital offers one point between 8am and 4.30pm, but this increases to eight points between 9.30pm and 8am. And if you want a stop-loss order, “there is an additional charge, normally between one and three times your stake,” warns Joshua Raymond of City Index.
But before considering the spread, Ricardo Evangelista of ActivTrades says beginners should first ensure the company they pick is UK-based (FCA regulation “is likely to offer more protection than the authorities in Cyprus or Malta”) and check how long the company has been operating. “Does it have a record of treating customers fairly?”
And when selecting a market, Raymond advises “choosing the one you know best – the most popular traded markets here are usually the FTSE 100 and Dow Jones”. Most companies will offer free demo accounts, so beginners can make comparisons for themselves. It is worth trying out a few.
Next, you need to establish what sort of trader you want to be. If you want to day trade, you’ll need a provider with quick execution, mobile and tablet trading apps, and tight spreads. New traders may want teaching – Finspreads, for example, has beginner accounts that allow novices to spread-bet from a minimum stake of 10p. “Whatever your style, all traders should look for tight prices and a robust platform,” says Raymond. If you’re an emotional trader, day trading may not be for you. If you have a low risk tolerance, you may favour tighter spreads over greater leverage if you have the choice.
TOO GOOD TO BE TRUE
The ability to trade on a margin is one of the attractions of spread-betting. Margin requirements will usually range from 5 to 10 per cent of the value of your open position, giving you significant market exposure. It sounds positive, but you could end up losing more than your initial investment. New tools, like the City Index Trading Academy, help teach new traders about getting started and the potential risks. And Capital Spreads offers regular seminars on spread betting and technical analysis.
If you are new, approach account opening offers with caution. They may appear attractive, but there will likely be a catch. “Those offers often come with near-impossible criteria, and the conditions attached tend to be harsh. Because, let’s face it, no one gives money away for free,” says Evangelista.
Other key differentiators include trading hours, credit accounts, and news and charting information. If these are important to you, there are plenty of online manuals to help you find a provider that meets your requirements. Companies are all offering mobile dealing, but it does have its shortcomings: the more you look at prices moving, the more you may be tempted to make impulse trades.