How Do Financial Spread Betting Companies Make Money?
When you’re investing, you need your broker to be your best friend. However, as much as your broker can help you (and they can be invaluable), you have to understand that they also need to make money in some capacity. Understanding how your broker makes a profit is essential in choosing the right one. In this post, we’ll take a look at how spread betting companies make their money.
Most companies make their revenue though the spread they charge. As well as a small spread, a margin is usually added by a broker to increase their revenue. Buy prices are always higher than sell prices, which means that a broker will always make a profit, regardless of whether you make a profit or a loss.
In addition, some brokers increase the spreads for spread betting as opposed to regular stocks and shares trading. Whereas the buy price may be £50 and a sell price £49 for a share when share trading, this may increase to a £52 buy and £48 sell price for spread betting. The difference is small, but it can add up so it’s important that you’re aware of it. Some brokers, such as ETX Capital, will still have spreads as low as 0.6 pips, so it could be worth shopping around.
Most spread betting companies will also charge for holding a position overnight. As a beginner, it’s easy to get too bogged down by the attractive spreads and lose sight of the fact that you have ongoing trading costs which can erode profits. You may be able to trade round the clock, 24/7, but there will be costs for doing so. Watch out for these and make sure you know the true cost of holding your position.
Finding the Right Broker
The combination of these fees and charges allows brokers to make money. As a beginner, you need to ensure that you choose the right broker for you, which will involve balancing charges and costs against the benefits of a broker, such as whether it has strong educational facilities, a reliable platform and good customer service. There are a number of considerations you’ll have to weigh up, so make sure you shop around to find the best broker for you. Don’t be scared to try a demo account to “try before you buy”, too.
To conclude, spread betting companies make money in a variety of ways. Before you register an account with one, make sure you know how they charge and what benefits they can provide you.