Watch out for this hidden spread betting cost

As a new spread better you need to decide what sort of time period you are going to bet over. The reason is you can then choose the right type of bet to match. Get it wrong and you could end up being hit for rollover costs.

Spread bets are very similar to futures contracts traded by the professionals. These often incur a 'cost of carry'. For example say I promise to deliver an asset to you in three months' time via a futures contract. In the meantime, my cash is tied up in that asset and isn't earning interest until I make delivery. So it makes sense for me to price the contract a little bit above the price of the asset were you to buy it from me right now instead this is known, perhaps unsurprisingly, as the 'cash' (or 'spot') price. I will charge you three months' interest that I could be earning if you bought the asset right now. This will mean the future contract is priced a little higher than the 'cash' price of the 'underlying' asset.

Now, as a spread better you might assume that any such costs are rolled up into the bid-to-offer spread. But that's not always true. Sure, if you choose say a monthly or quarterly bet, then the bid to offer spread will be the only cost you normally face. You will also be entitled to run the bet right up to the end of the month or quarter without incurring further costs.

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However, you can also opt for rolling spread bets if you are gambling over a much shorter time. Day traders, for example, might prefer bets that have very tight bid-to-offer spreads (tighter than a monthly or quarterly bet on the same asset) but accept that they will be charged to rollover the contract and keep it running beyond the market's close that day.

As someone who buys a spread bet, and puts down a small deposit, you are charged this financing fee every time you rollover a contract overnight. The logic is that by buying a spread bet and putting down, say, a 10% deposit as margin, rather than getting the equivalent exposure to the equity market by buying 1,000 shares, you save yourself cash which can earn interest overnight. The financing charge compensates your broker for this and the fact they offered you a tight spread in the first place. If you close your position on the same day as you open it, there is no financing charge to worry about.

Equally, if you run a short spread bet overnight you will be credited with a little bit of interest (usually using a rate that is slightly below money-market deposit rates) for the same reason.

The trade off is this if you use 'long' (buy) short term rolling bets and run them for weeks you still keep the spread tight but will rack up financing charges. On the other hand, if you pick a quarterly bet but then close it and take profits a few days later you will suffer a wider spread than you needed to. So there's a balance to be struck.

Although it's not always easy to get it exactly right, deciding up front what timeframe you want to bet over can reduce your trading costs.