Overnight financing

[charliechan]

Hi gang,

I've long been anti spread betting. I took the time to read some of the companies web sites to keep abreast and see if it's worth changing my opinion. After all, I am thinking of taking some med-long term views on a few markets and thought spread betting may be a viable vehicle.

NOPE!

Look at the overnight financing charges they offer. It may seem like a small take, but it is exactly these small amounts which build over time (every day in this case - even weekends) that will negate any gain made. Kinda like anti-compound interest, or the fraction we all know casino's make on every bet over average ensuring every punter loses over the long haul.

I'd be interested in what others here think. Please bear in mind the average stock index (FTSE, DAX, S&P etc) has an average annual return of 7%-10%

Any argument supported with math will be most enlightening!

Happy New Year!

CC

 

[tomorton]

Surely if you take a position in an index for a future month, rather than what the SB firm offers as a Rolling market position, there are no overnight financing charges? OK the spread's wider, but over a month or more, is that significant to your trade?

 

[lancenicolase]

As you correctly say stock market offer 7%-10% annual return.
Now let's do some math... if you take a spread betting company like CS you will have to pay LIBOR+2% in overnight charges, as BoE official rate is just 0.5% and LIBOR is very close to it you will have to pay about 2.5% a year in overnight charges. Thus you return will be 4.5%-7.5% a year. If you add the leverage (let's say 10% margin) you will make 45%-75% return.

So tell me why spread betting is bad?

 

[tomorton]

I feel like I'm in lost in a strange land i don't recognise.

Stock market returns average 7-10% per year?
Overnight charges when spreadbetting?
45-75% return a year on a long-term index position after overnight charges?

 

[lancenicolase]

I feel like I'm in lost in a strange land i don't recognise.

Stock market returns average 7-10% per year?
Overnight charges when spreadbetting?
45-75% return a year on a long-term index position after overnight charges?

All I'm trying to say is that overnight financing charges are very low at the moment and it's a good idea to use financial spread betting for longer term trades.

 

[charliechan]

sure. but thats kinda my point.

ok you may get a load of leverage with sb. the argument seems to be that the overnight financing is negligible when considering the extra profit that leverage gives. remember leverage is increased if you give the sb a stop loss order as well (another topic, but nevertheless, part of the picture).

the point is, is that all those overnight costs will ad up to quite a bit every day. Lets say you add up all the costs of the overnight financing (remember they also hit you at the weekend when the market isnt open to help generate profit) for a whole year of holding the position, and compare them to the unleveraged return of 7-10% return on capital. I think you'll be surprised

I say unleveraged, because you could use the futures with just as good leverage with no financing costs (other than missed interest from holding in a bank) unless you borrowed money for the position. - just for comparison

 

[montmorencyt2w]

Don't forget they pay you in certain cases, e.g. when I was long AUD/USD for long periods last year I was getting a nice little payment each night.

Admittedly my SB firm changed their rules during the year ("to bring it in line with the industry") which in effect increased financing charges in the cases when I was paying them, so it tended to negate somewhat the credits I was getting :-(


I agree with the general point though that yes, you do have to watch out for financing costs.

 

[charliechan]

Don't forget they pay you in certain cases, e.g. when I was long AUD/USD for long periods last year I was getting a nice little payment each night.

Admittedly my SB firm changed their rules during the year ("to bring it in line with the industry") which in effect increased financing charges in the cases when I was paying them, so it tended to negate somewhat the credits I was getting :-(


I agree with the general point though that yes, you do have to watch out for financing costs.

GOOD FOR YOU! thats great - and shows what im on about. getting it to work for you. I bet the premium you collected was better received than paying right!

 

[charliechan]

These costs may seem negligible day to day, but the pennines add up over time - just like a small % difference in yield/return cumulative, adds up to surprising amounts in time; The Wisdom of Ages.

I guess shorting Fixed income (that 'theory' says should decline in premium as interest rate increases) via sb in times of high interest rates (eg bunds or gilts) could be a way of collecting good premium as montmorenyct2w eludes to.

 

[setanta]

you are right, the pennies do add up and we would all rather keep those pennies in our pockets than in the pockets of the SB firms..

you only have to look at the comparison table on spread co's site to see the big differences between spread betting firms and how much they charge - spread co charge £8 on a £10 a point short possie on the Dow for a week, IG charge £90!! £90!!!!!

That is a massive difference. If you want to trade on the short side, no one seems to be better than spread co it seems (well at least on the list on their site...)

 

[Hoggums]

If you are holding long term positions then trade SB futures - not the rolling daily, then you will not suffer these exorbitant charges.

 

[setanta]

If you are holding long term positions then trade SB futures - not the rolling daily, then you will not suffer these exorbitant charges.

sure, that obviously is the thing to do, but it sometimes happens that you open a spot trade rather than a futures trade, maybe not with the intention of running it for long, but it can end up sitting there. either it goes in your favour and you are happy to let it run, trades sideways for a few days, but you are still convinced your position is a good one so you let it, or the worst way, but one many of us get dragged in to, something goes against you but you dig your heels in and stick to your stop loss level.. those trades can last for days!!

 

[tomorton]

sure, that obviously is the thing to do, but it sometimes happens that you open a spot trade rather than a futures trade, maybe not with the intention of running it for long, but it can end up sitting there. either it goes in your favour and you are happy to let it run, trades sideways for a few days, but you are still convinced your position is a good one so you let it, or the worst way, but one many of us get dragged in to, something goes against you but you dig your heels in and stick to your stop loss level.. those trades can last for days!!

I made the same suggestion as Hoggums a while back in the thread. Rolling bets such as discussed aren't for the long-term. Letting the position manage the trade cannot be right.

 

[charliechan]

Thanks guys - so if I hold a futures contract as the 'underlying' of my spread bet, I dont get the rolling /overnight financing charge I would do if I selected a rolling contract? Did I understand that correctly?

I must admit I didnt realise there was a difference or that you could select futures or rolling.

 

[charliechan]

Well, thanks for your input folks.

I've looked into this some more and managed to see that spread betting is just a fools errand pure and simple. The overnight financing may seem like only a small vig, but I know that over time it all adds up, like compound interest. Those that can be bothered to do the math will see this.

I can do what I need to do with ETF's on various commodities.

I can see no benefit or reason anyone would want to open a spread betting account other than simply for fun. I know people will say ' well what about the small trader who cant afford the 10k for a regular account....' My answer would be keep paper trading until you can.

a fool and his money are easily parted......

 

[tomorton]

There's no overnight financing if you don't hold overnight. Anyway, not all SB books require overnight financing.

 

[montmorencyt2w]

And if you hold (for example) long AUD/USD, they pay you.

If I understand correctly, if HMRC decide that you are trading for a living, they will charge you not CGT, but income tax, and if you are getting enough you'll be paying at the higher rate.

So let's say you are paying 40% income tax (after the various allowances have been made) (if you are doing really well, it will be 50%).

But you may also have to pay whichever class of NIC which is an income tax in all but name ... at least 12% I think.

So you could be giving at least 52% of your trading income away (above a certain amount), and possibly more.

Yes, no doubt a clever accountant will help you reduce this a bit (for a hefty fee).


So I think there is plenty of incentive to spread-bet in the UK, at least for the time being. If you somehow manage to get above the radar of HMRC as a spread-better, you may still have problems, but at least until that time comes, you can build up slowly without having to lose too much sleep over them.

 

[charliechan]

So why aren't professional traders like myself using spread betting as their main platform rather than futures or equities?
Why do we spend $1000+ per month on trading software alone? I'm not a scalper either before you ask!

 

[montmorencyt2w]

So why aren't professional traders like myself using spread betting as their main platform rather than futures or equities?
Why do we spend $1000+ per month on trading software alone? I'm not a scalper either before you ask!

I love rhetorical questions.



All right, you can offset the costs of your software, multi-screen desk setup, and costs of maintaining your home office (if that's where you trade), and no doubt several other things. Yes, you can play all sorts of accounting tricks. Let's take that as read. You still have to make a profit on top of this, and pay your accountant.

So, less the standard allowances and the allowable expenses, you are taxed on your profits. Do you question the numbers I suggested? Fine. Then give your own. Percentages, not actual numbers.


Whenever I have asked questions like this on T2W, I rarely if ever get a straight answer. I suppose I can't blame people for keeping quiet about their own tax affairs on a public forum. You never know who is going to read it and may find some way of working out your actual identity. Fair enough, but I've never even seen someone explain the general principles of how their tax bill is worked out in a convincing way. I've just seen statements that when I've been able to check against numbers on an official website don't really stack up.


I don't think I' ve even suggested that spread-betting is the best way for a professional trader to trade (although I don't think that it has been proved impossible to be done, either. I think some traders on T2W have at least started out this way).

What I think it probably is ideal for, is part-time traders to start small and gradually grow, without having to get into the additional stress of tackling HMRC as well as the markets.

(I was talking to someone socially yesterday who works at HMRC, who confirmed some of the tales of woe that I have alluded to here on other threads. My wife used to work for the old Inland Revenue many years and several reorganisations ago, and for the most part, the changes made since her day are for the worse).

 

[charliechan]

I love rhetorical questions.




What I think it probably is ideal for, is part-time traders to start small and gradually grow, without having to get into the additional stress of tackling HMRC as well as the markets.

this is my point.

if youre a small trader/part time (fine, everyone starts somewhere) sb is THE worst thing you can do because the odds of winning are against you because of the much higher transaction costs with sb, and the tricks they play.

a traders priorities in order are as follows:
1/ conserve capital. dont lose money
2/ make money
3/ pay less tax.

if #3 is your priority, youre putting the cart before the horse. inherently, sb also goes against #1. thus the chances are even slimmer of success than a trader in a proper market