Spread betting is a lucrative method of betting on price movements of financial instruments without actually owning them. When you spread bet, you’re only speculating on the direction the prices will take, and your returns will be commensurate with how much price moves.
For example, Apple shares closed at $143.82 on the 30th of March. The conventional way of investing in such a stock would be to buy the shares, if you believe the share price will rise in the following days. Instead, you can use spread betting if you think the share price will rise, and every movement will count. In the example, let’s assume the bid and ask price was $143.80 and $143.84 respectively. If you made a long spread bet, meaning that you bet the price will rise, your order would be filled at $143.84 and every move would count.
Say, prices rose to $144.00 in a week, that would be a difference of 16 (144.00 – 143.84). That difference would then be multiplied by the amount you bet for every move, so, if you bet $10, then you would have made $160. The same calculations would be done if the move went the other way, and the size of the move would be your loss.
As you can already see, spread betting has an advantage over traditional stock trading because profits are much higher. The other advantage is that you don’t need a lot of capital to trade these instruments. To get the same $160 profit from Apple stocks through a stockbroker, you would need to buy 1,000 shares worth $14,384.00, and that’s even before we considered other associated charges.
Due to its lucrative returns, it’s easy to see why spread betting has become popular, and there are a number of brokers who have established themselves as spread betting brokers. As the number of choices increases, the choice becomes harder, and this is why you need to be careful when choosing a broker.
Why you need a good broker when spread betting
Spread betting is not centralized, which means there is no exchange where you can make spread bets. In fact, the spread betting market is created by brokers, who just provide the quotes and allow you to make the trades. In this market, even the best spread betting brokers will be the actual market makers as there is no interbank market for spread betting.
Obviously, this presents a potential conflict of interest because you’re betting against your broker – gaining as they lose and vice versa. As such, your choice of a broker will be crucial and you will have to find the best spread betting broker.
What to consider in a spread betting broker
All brokers will offer different services and features, but the following are the most important:
There are going to be some charges the broker will have to deduct for enabling you to spread bet. The most common charges are deducted in the form of spreads, which is the difference between the actual market price and the price at which your order is filled. The example above on Apple shares are a very good example – even though Apple shares are valued at $143.82, your buy order is filled at $143.84, which is 2 cents more.
The spread is the difference between the bid and ask prices, therefore the spread in our example would be 4 (143.84 – 143.80). A 2-cent spread can seem small to the individual trader, but considering the number and size of trades a broker handles, the number adds up to a reasonable amount.
Various brokers will offer different spreads, and it is up to you to do your research and find the one with low spreads. When you’re spread betting with narrow spreads, the difference in price movement becomes larger, hence producing more returns. It also conversely reduces your losses in cases where you’re wrong.
Spread betting brokers rarely charge commissions, but it’s not uncommon to find a broker who charges a commission on profitable trades. Here, you just have to find the lowest commissions, which is even easier than identifying low spreads. There are certain advantages to charges by commission compared to spreads, and also downsides. Again, it is up to you to do your research and determine which system will work best for you.
Other charges which aren’t usually mentioned include overnight holding fees, which are incurred if you hold your position after the New York session ends. Premiums may also be incurred when shorting as a form of borrowing charge. Find out all of a broker’s charges before you make your deposit and start trading.
Number of tradable instruments
Since spread betting is derivative, it can be applied on any market from Forex, stock, commodity, indices, etc. Nevertheless, a broker cannot make all these markets available, and they will usually just identify the most common tradable instruments and offer those. This makes sense, of course, no one would want to offer something that isn’t required, but it’s still better when a broker has more than less.
Check with the broker’s website to find out how many assets in each kind of market they have to offer. The top spread betting brokers will be those with the widest variety of tradable instruments.
The broker’s trading conditions can literally make or break you. For instance, the speed of execution will determine how much profit you make because the markets can turn against you before the order was filled. A great source for this information would be spread betting brokers reviews which are written by the broker’s clients. A broker will never admit that their trading systems are slow.
Another factor to consider here is how the trades will be made, i.e. whether there is a dedicated trading platform or not. The trading platform will be how you receive quotes and also the same platform from where you place orders. The top spread betting broker will provide a downloadable trading platform which can be installed on your computer or smartphone so that you can trade comfortably. Others on the top spread betting brokers list will have a web-based platform, which is also good enough, although it may not be as capable as a dedicated platform.
Capital requirements and leverage
You would also need to make a deposit into your account with which you will initiate trades. Every broker will have their own minimum requirements for this, depending on the structure of their trades. The minimum bet size will usually determine how much of a deposit you be required to make, and this will always reflect on the broker’s minimum capital requirement.
Leverage further adds to the profitability of spread betting just as it increases the losses. Check to see how much leverage the broker offers and whether that would suit your trading style and risk appetite.
What makes a great spread betting broker?
After you have checked all the boxes in the above section, now it’s time to eliminate a few brokers on your list and remain with only the best spread betting brokers list.
Consistently low/tight spreads
Some brokers will try to get traders hooked by advertising that they offer the lowest spreads, and this would be partly true. Such a broker could offer tight spreads only on a few tradable instruments while leaving the rest with a wider spread. It is only after you’ve signed up and began trading that you realize what the broker did. In other cases, they may only maintain low spreads when there is little volatility and then widen those spreads astronomically in volatile markets.
A good broker, though, will try to keep spreads low across all the products you can spread bet on, and in all market situations. Of course, this means that their spreads may seem a bit higher compared to other similar brokers, but this is the broker you should choose. By keeping spreads low on all products, it allows you to try trading with other assets other than those you’re already comfortable with. Also, when spreads remain low in volatile market conditions, it provides added trading opportunities when other traders are avoiding the markets.
To know such a broker, find out their average spread over different assets and over a longer period of time. Spread betting brokers should provide a page for visitors to view their spreads on various assets. If the broker you’re looking at doesn’t, then that should be a red flag. Low spreads over, say, one month would be a sign of a good spread betting broker because it shows their spreads are consistently low. Volatility is also likely to arise within 30 days, so a month’s analysis is also enough time to see how the broker responds to high market volatility.
Extended bet duration
There will also be a time limit to how long you can keep a trade open, and this will be determined by the broker. inasmuch as they may be charging you for every day that passes, the broker can’t keep the trade open for too long. A top rated spread betting broker is the one who allows you the most time to hold on to a trade and realize maximum profits.
Favourable trading conditions
Depending on your needs, find the broker who works for you. Consider how much money you’re willing to trade, how often you place trades and what you want to trade. Then, pick the broker who fits into your needs, instead of having to change your preferences.