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Introducing the LemonFools Personal Finance Calculators

Use of Spread Betting

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
bluedonkey
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Re: Use of Spread Betting

#199500

Postby bluedonkey » February 7th, 2019, 9:58 am

Just say no.

hiriskpaul
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Re: Use of Spread Betting

#199512

Postby hiriskpaul » February 7th, 2019, 10:28 am

An alternative to obtaining gearing through spread betting is using conventional broker account borrowing. For example, agreed funding at Degiro costs LIBOR+1.25%. Ad-hoc borrowing 4%, but these rates only apply to the amount borrowed, unlike funding at IG. So if you put up 60k, borrowed 40k to invest, you would only pay interest on the 40k.

The main disadvantage with going down this route is of course gains and dividends are taxable. Loan interest cannot be used to offset tax either, unfortunately. Collateral requirements are higher as well, so following a significant downturn it is more likely you may be forced to sell stock, or find cash from somewhere else. Broker borrowing might be worth considering though for what you want to do.

moorfield
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Re: Use of Spread Betting

#199524

Postby moorfield » February 7th, 2019, 10:51 am

moorfield wrote:
hiriskpaul wrote:Unless that is you intend to run a widely diversified portfolio in a SB account, in which case your portfolio volatility would obviously reduce.


Yes that's what I have in mind. The same 15-20 shares that one might put in an HYP.


Pondering overnight whether I might simplify this idea further and build/drip feed a long position on CTY (City of London IT) instead. £60 deposit, £100 exposure, £20 (initial) margin. The biggest peak-to-trough sp fall in recent years was ~15% in 2015. No guarantees of course it won't all go badly worse in the future!

hiriskpaul
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Re: Use of Spread Betting

#199537

Postby hiriskpaul » February 7th, 2019, 11:24 am

One of my rollover transactions on my FTSE 100 futures bet was wrong. Here are the correct rollovers:

Rollover        Period     P/L per point
20/12/2018 DEC-18 -613.5
20/09/2018 SEP-18 -360.5
14/06/2018 JUN-18 725
15/03/2018 MAR-18 -260.5
14/12/2017 DEC-17 197.5
14/09/2017 SEP-17 -62.5
15/06/2017 JUN-17 79
17/03/2017 MAR-17 478
16/12/2016 DEC-16 303
16/09/2016 SEP-16 828.5
16/06/2016 JUN-16 -164
17/03/2016 MAR-16 117.5
18/12/2015 DEC-15 -53
18/09/2015 SEP-15 -452
19/06/2015 JUN-15 -215.5
20/03/2015 MAR-15 567
19/12/2014 DEC-14 -338.5
19/09/2014 SEP-14 50.5
20/06/2014 JUN-14 315
21/03/2014 MAR-14 29.5
20/12/2013 DEC-13 -21.5
20/09/2013 SEP-13 492

That gives a total of profit/point of 1641, leading to a profit of 27% with 100% funding and 45% at 60% funding. So a 100% funded futures bet did underperform the return of the Vanguard ETF (31%) over the period, which is what I would expect due to the implicit funding costs in the futures contracts.

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Re: Use of Spread Betting

#199541

Postby hiriskpaul » February 7th, 2019, 11:32 am

moorfield wrote:
moorfield wrote:
hiriskpaul wrote:Unless that is you intend to run a widely diversified portfolio in a SB account, in which case your portfolio volatility would obviously reduce.


Yes that's what I have in mind. The same 15-20 shares that one might put in an HYP.


Pondering overnight whether I might simplify this idea further and build/drip feed a long position on CTY (City of London IT) instead. £60 deposit, £100 exposure, £20 (initial) margin. The biggest peak-to-trough sp fall in recent years was ~15% in 2015. No guarantees of course it won't all go badly worse in the future!

The spread on CTY is about 1%, so rollovers will cost you around 4% per year. You would probably be better off running a DFB and paying daily funding if you go down that route, or use a Degiro account if the additional tax is not too big a burden.

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Re: Use of Spread Betting

#199561

Postby moorfield » February 7th, 2019, 12:20 pm

hiriskpaul wrote:The spread on CTY is about 1%, so rollovers will cost you around 4% per year.


Thanks that's useful. Next logical step then would be to look at how an annual 4% running cost as a sb looks versus a 55% LTA charge in 30 years' time for the same exposure inside a sipp. Assuming margin/shirt is not lost in the meantime. Something to tinker with over the weekend ....

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Re: Use of Spread Betting

#199648

Postby hiriskpaul » February 7th, 2019, 4:58 pm

moorfield wrote:
hiriskpaul wrote:The spread on CTY is about 1%, so rollovers will cost you around 4% per year.


Thanks that's useful. Next logical step then would be to look at how an annual 4% running cost as a sb looks versus a 55% LTA charge in 30 years' time for the same exposure inside a sipp. Assuming margin/shirt is not lost in the meantime. Something to tinker with over the weekend ....

I had a look at the chart for CTY and there was around a 50% peak to trough fall during the financial crisis, so not confident in any low volatility aspect when the next crisis comes along. With 20% initial margin and 40% variation margin, a 40% market fall would wipe out your variation margin and put you on the edge of forced sale territory. Then there are the funding costs of LIBOR + 2.5%, compared with LIBOR for FTSE futures. Even with gearing, is CTY likely to beat the FTSE 100 by 2.5% per year over the long term? That sounds like a tall order and a huge leap of faith in current and future fund managers.

A long term geared investment in a geared IT that invests in geared securities, as most ordinary shares are, might be pushing your luck a little far with only 40% variation margin.

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Re: Use of Spread Betting

#199671

Postby hiriskpaul » February 7th, 2019, 6:38 pm

p.s. You might want to factor in that we will not be BoE of 0.75% forever. Could easily be 1.5% by the end of 2020.

p.p.s. The 55% charge on exceeding the LTA is not compulsory. You could opt for a 25% charge, then income tax on drawings. So if you only draw as a basic rate taxpayer, the total hit is 40% (100% - 75%*80%) not 55%.

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Re: Use of Spread Betting

#199718

Postby moorfield » February 7th, 2019, 9:08 pm

Thanks hiriskpaul, as I mentioned on the OP I am flying a kite with this idea. I know we've discussed spread betting here at LF many times before so your time and opinions are appreciated. Plenty of food for thought.

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Re: Use of Spread Betting

#201742

Postby PLS1nve5t » February 16th, 2019, 11:06 am

A different use case, but I use spread betting as there is a software interface to the IG website (IG Labs), this allows me to do automated day trading.
This would not normally be possible as I have a full time day job.

The spread is wider, but as there are no broker fees, stamp duty or occasionally foreign exchange fees, I'd say its not too dissimilar in cost to regular share buying, and the profits are tax free.

Only additional cost is the rented Amazon server that executes and monitors trades - this costs about 5 or 6 pounds a month.
All very convenient really.

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Re: Use of Spread Betting

#201770

Postby tikunetih » February 16th, 2019, 1:02 pm

In the main, bucket shops make money when their customers lose money, hence your interests are opposed not aligned, and yet they set the rules.

So, watch out for a period of high market stress when they decide to massively raise your margin requirements and give insufficient time for you to provide additional funding (perhaps you're on holiday and cannot respond in the 48 hrs/ 24 hrs /6 hrs / 1 hr / 30 mins provided), and you're closed out at the bottom of the market, just the time when you as an investor would normally be buying/adding to positions...

Collecting pennies in front of steamrollers etc.

langley59
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Re: Use of Spread Betting

#201785

Postby langley59 » February 16th, 2019, 2:22 pm

PLS1nve5t wrote:A different use case, but I use spread betting as there is a software interface to the IG website (IG Labs), this allows me to do automated day trading.
This would not normally be possible as I have a full time day job.

The spread is wider, but as there are no broker fees, stamp duty or occasionally foreign exchange fees, I'd say its not too dissimilar in cost to regular share buying, and the profits are tax free.

Only additional cost is the rented Amazon server that executes and monitors trades - this costs about 5 or 6 pounds a month.
All very convenient really.


That's very interesting PLS1nve5t, did you not consider using IG's ProOrder on their ProReal Time charts?

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Re: Use of Spread Betting

#201871

Postby PLS1nve5t » February 17th, 2019, 8:06 am

langley59 wrote:
That's very interesting PLS1nve5t, did you not consider using IG's ProOrder on their ProReal Time charts?


Thanks langley, I was not aware of that as a product, shall give it a try after next weeks holiday - need to get the most out of the free trial :D .


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