Spread Betting Explained – Daily Markets Spread Betting


Daily Markets Spread Betting

As you would expect the daily market in financial spread betting, refers to a contract that is valid for one day ( a bit like a one day travel card!) and which expires at the close of trading of the underlying market. So if you are still holding the contract when the underlying market closes, your contract will also be closed, and any profit or loss from the spread bet is added to, or deducted from, your trading account. This seems simple enough, and as the contract only has a life of one day, there are no financing costs involved as it is not rolled over ( which I will explain shortly). As this is a daily contract, the prices quoted will closely match the underlying instrument or asset. Now despite the fact this is quoted as a daily market contract, many of the spread betting companies will allow you to buy ( or sell) these contracts outside of exchange hours, but you will have to pay for this option with a wider spread.

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This will be specified in the market data, which will state whether the contracts are available 24 hours a day, or simply during exchange hours. Now one of the most popular for daily markets are the indices such as the FTSE100 and DOW, and this is where you need to be careful as to the exact contract you are trading. If you remember when I explained that we are now trading derivative contracts, I mentioned that we have an underlying asset ( or instrument) from which the contract is derived. Now in some daily markets we have two possible sources for the same market, known as “cash” and “futures”, so let me try to explain.

The market we all know best is probably the FTSE 100, but what is probably less well known is that there is a FTSE100 futures index also quoted simultaneously. So we have the same market quoted in two different ways. The first is called the “cash” market, simply because it involves real cash, with the market trading in real shares for real money, and the second is called the “futures”, as it is derived from the cash market and is speculative trading in futures contracts. So on a daily basis in financial spread betting we have either FTSE100 cash contracts, or FTSE100 futures contracts, so we must be VERY clear when we place an order online or on the phone.

Why? – put simply the futures market leads the cash market, as the cash market reacts more slowly to breaking news due to the lag in updating live share prices on any news. So the futures market will always react in advance of the cash market, and is generally the market that financial spread betting companies will use to set their spreads. It is important to realise that it moves much faster and is generally more liquid than the cash market. It is very easy to compare the live market cash index quote with the spread betting quote and assume ( wrongly) that the company has marked up prices. The truth is that the quote is based on the futures market and not the live cash market, and represents where the cash market would be if it didn’t lag behind the futures.

The same principle is at work when spread betting on the daily markets for stocks and shares with an underlying cash market, where real cash is paid for real shares and stocks and is based on the underlying cash price of the share. As before, daily market spread trades will expire on the same day as the position is opened. So just to summarise – we have three elements that we need to be very clear on, when spread trading in the daily markets. Firstly we need to know that it is a daily contract and therefore will expire on the same day the position is opened, secondly we need to know the market or instrument we are trading, and finally we need to check whether we are spread betting the contract for the underlying cash market, or the futures market!

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Author: Melanie Young

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