Beginners Guide
What is a Spread trade?
Spread trading is a tax free 1 cost effective alternative to traditional share trading. It allows you to speculate on the movement of stocks and shares without using a stockbroker, therefore you do not have to pay commission or fees. We make a spread around the live, underlying market price and you can trade on whether this market will rise or fall.
trading on the movement of stocks and shares allows our customers the opportunity to generate potential profits on both rising and falling markets. Spread trading therefore offers all the advantages of speculating on the stock markets and much more.
How does it work?
Spread trading is an efficient alternative to traditional trading in the financial markets.
Not only is it more versatile, by allowing you to either go long (buy) or short (sell) a share, it is extremely cost effective, as you do not pay commission or fees. If you are a UK resident, your profits are Tax Free1. You can also use Spread trading as a hedging tool, to protect investments in an existing share portfolio.
The “spread” in the phrase Spread trading refers to the Sell (Bid) and Buy (Offer) price quoted by a spread trading company. This price is calculated around the live (or the estimated future) market price of a financial product. For example, if the Daily UK 100 is trading at 4729 our quote might be 4728-4730.
When you spread trade, you do not buy the stock or share but instead you make a trade as to which way you think the market or share-price will move. You can trade per penny or point movement – the amount you wish to trade is known as the “stake”, and can be as little as £1/€1/$1 per point or penny movement.
This diagram shows how your profit is calculated depending on whether you buy or sell the market, assuming your stake is £1:
At Saxo Bank Financial Spreads, only small deposits are required to open a new position (as little as £10-£40 for a £1 trade depending on the market concerned). Once you have chosen the market on which you wish to trade, you can then trade the stake of your choice, which will represent your profit or loss per point movement in that market (each market has its own individual maximum allowable stake).
You can then trade £1/ $1 / €1 per point/tick/cent on the movement of spread prices that we quote. You can choose to trade that the market will rise, or alternatively, you can trade that it will fall. If you are right, you will make a profit of your stake multiplied by each point that the market moves in your favour. If you are wrong you will make a loss of your stake multiplied by each point that the market moves against you.
For this reason you must be aware that your losses can increase dramatically if the markets move substantially in the opposite direction to your trade (i.e. if you make an Up trade in the UK 100 and instead of going up it goes down). All spread trading profits are recognised as the winnings of a trade, and are therefore free of Capital Gains and Income Tax in the UK.
1 For residents of UK & Sweden. Please check your local tax laws. Tax law can change
Example of a UK 100 trade:
If the UK 100 Share Index is currently trading at 5278, Saxo Bank Financial Spreads may quote 5277 (the sell price) – 5279 (the buy price). This quote (which has a 2 point spread) allows you the opportunity to trade that the value of the UK 100 will fall or rise. If you believe that the value of the UK 100 will fall, you should Sell (or make a down trade) at 5277 or if you think the UK 100 will rally, you would Buy (or make an up trade) at 5279.
Assuming you decide to sell, the following example is based on a trade of £5 per point movement:
The market falls and you decide you would like to realise your profit. The UK 100 is trading at 5154 and our quote is 5153-5155. You will need to make a buy trade at 5155 to close your original sell trade. Similarly, if you had opened your position with a Buy trade, you would need to Sell to close.
In the example above if you close your position with a buy trade as quoted by Saxo Bank Financial Spreads, your winnings would be calculated as follows: 5277 – 5155 = 122 x £5 = £610
Obviously, if the market begins to rise, you have speculated incorrectly and your trade will begin to incur a loss. This is calculated in the same way as your profit.
Online Trading
Saxo Bank Financial Spreads online trading is easy to master. You can observe our live prices before you trade. Then, select the market of your choice and enter your stake into the appropriate field. A trading ‘ticket’ or pop-up box will be created and a live sell/buy price is quoted. This price will change as the market fluctuates.
If you wish to buy, click on the Buy button. Once your trade is activated, an online ticket will appear on your screen detailing all of the information concerning your trade (the prices, stake, market, action (buy/sell), ticket number, and expiry details) – this information will also be sent to you via email. You can print this information if you wish.
You will also be given an automatic stop level, which indicates where our system will stop and close your position (you may amend this stop level at the time you make your trade). All stops are on an ‘our quote’ basis, which means that your position will be closed at the Saxo Bank Financial Spreads price quote and not the live market price level. Stop-Losses are not guaranteed.
Example of an Online trade
It is now November and the Saxo Bank Financial Spreads Barclays March spread quote might be 499.3-503.0. If you believe that the share-price will rise over the next 3 months, you would “buy” at 503.0. You need to decide your stake and then, click on the Trade button. For this example, lets say you choose a stake of £2 per penny movement.
This means that you will receive £2 for every penny the share price rises. If the share Saxo Bank Financial Spreads quote for Barclays rises to 511.0-513.5 you may decide you want to close your position to realise the profit.
A sell trade always closes a buy trade, and vice versa. Alternatively, you can leave the trade to expire in March, when your trade will be automatically closed.
If, however, the share value falls and you do not sell to close, your trade will close if it reaches your CGSL or Stop-Loss level of your choice, ensuring that you do not incur excessive losses2.
The previous example shows that you opened your trade at 503p and that when the market fell, the trade was automatically closed by a Computer Generated Stop-Loss (CGSL) at 453p. The maximum loss on this trade was £100 (503.0 – 453 x £2 = £100).
As the graph shows, the share price continued to fall, whilst the Stop-Loss ensured that further losses were not generated.
Try a Demo Account
If you are new to spread trading, we highly recommend that you sign up for our online Demo Account. The Demo Account mirrors our live trading system in all respects, other than the requirement for depositing funds! Used in conjunction with our online Beginners Guide you can really get to grips with the concept of Spread trading or familiarise yourself with our trading platform before you begin Live Trading.
Why should I spread trade?
Spread trading allows you to trade on a huge variety of financial products in one place and in one currency. You make your trades in one of 3 currencies (Sterling, US Dollars or Euros), which means you do not have to bother with costly exchange rates and can, in general, trade in your own currency.
Spread trades are margined trading products, which means you need only deposit a small percentage of the full value of your trade leaving your excess capital to continue working hard elsewhere. For example, a £1 trade on a share is the equivalent of buying (or selling) 100 real shares. On most shares our minimum Initial Margin Requirement (deposit) is 3-5% of the underlying value of the shares which means that you can take a trade in a share with as little as 1/30th of the money required to buy the actual real shares from a stock broker.
Also, because Saxo Bank Financial Spreads is not a stockbroker, we do not charge commission or fees. We make our profit from the spread we add to the underlying market prices, which result in our quotes. Plus, don’t forget, that UK residents benefit further because your profits do not incur Capital Gains and Income Tax.
Whilst spread trading offers many benefits, it is important to note that it carries a high level of risk to your capital, so you should only trade with money you can afford to lose. Whilst we offer compulsory stop-losses, it is possible for you to lose more than your initial deposit. To read more about the risks, please click here.
Bull or Bear
One of the most obvious advantages of spread trading is the unique opportunity to go short of (or sell) a stock or share. You can therefore experience the benefit of either a rising or falling market!
No Commission or Fees
Because Saxo Bank Financial Spreads is not a stockbroker, we do not charge commission or fees. The only “fee” is the spread we charge on the prices that we quote.
Gearing
Spread trading also allows you to trade in sizes smaller than those usually available in the underlying market. Similarly, you may also benefit from an opportunity to trade in larger positions than are normally permitted in the underlying market, without depositing large sums of money.
Tax Free Profits
All spread trading profits are recognised as the winnings of a trade, and are therefore free of Capital Gains and Income Tax.
Tight Spreads
At Saxo Bank Financial Spreads our mission is to provide value for money plus top quality service. You’ll find our spread quotes far better value that most of our competitors. In some cases, you will find that our spreads are extremely competitive in relation to the live, underlying market quotes.
For example, our Daily Rolling UK 100 spread is just 2 points and our Daily Rolling Sterling/Dollar quote is just 4 points. Compare our spreads to that of our competitors
Limit your Risk
Spread trading is a high-risk activity, but at Saxo Bank Financial Spreads we want you to enjoy your spread trading experience. The automated stop-loss facility we provide is an invaluable tool, which encourages you to understand and control your risk. Although you must be aware that stop losses are not guaranteed.
Your stop-loss is set according to the funds available on your account up to a maximum computer-generated level. You can amend your stop-loss to suit your needs. We also hold an additional 25% of your funds to allow for slippage or a market gap.
Risks
Although you can make substantial profits from spread trading, if the markets move against your trade, your loses can also be substantial and although Saxo Bank Financial Spreads has a policy of attempting to limit client losses on trades by applying an automatic stop–loss to each trade you make, these stops are not guaranteed. As a consequence, if a market gaps, you may lose more than your initial deposit.
Why should spread trading interest me?
Spread trading appeals to a wide variety of individuals who want to take advantage of the versatility and great value that spread trading can offer.
Experienced investors use spread trading as an additional trading tool as the spreads we offer rival the prices available in the real market. Alternatively, many investors use spread trading to hedge their existing share portfolio. For example, if you have some shares, which are decreasing in value in the short-term, you could “Sell” the value of the share using a sell trade with Saxo Bank Financial Spreads and possibly make a profit to counter-balance the decreasing value of your shares.
You do not need to be an experienced investor to spread trade, but you do need to research the products that you wish to trade and be aware of the risks associated with spread trading. Many individuals new to spread trading use technical analysis to guide their investment decision. Saxo Bank Financial Spreads provide charts for every product we quote to assist you with your technical analysis.
One of the problems for spread trading companies is the word ‘trading’ as this gives a false impression to the marketplace. Spread trading is in fact a highly adaptable trading tool. With a Saxo Bank Financial Spreads account you can trade in many financial products using just one currency – we offer prices on UK, European & US shares, World Indices, Commodities, Foreign Exchange, Bonds and STIRS. You can trade on the Cash, the Future or our new Rolling Daily products.
Other Questions
If you have any other questions about Spread trading or Saxo Bank Financial Spreads, please review the Frequently Asked Questions section of our site, or click here
