Revenue from the Spread:
The spread betting firms´ main revenue stream is by way of charging spreads to their clients who trade with them. Over and above the spreads, the companies even charge a margin on the actual quoted price of the share. For example, if a share has buy price of $100 and sell price of $101, the actual trading price could be $99 for sell and $102 for buy. In order to assure that broker always gains from the trades, thebuy price is always higher then sell price.
The Books – named A and B:
The companies also split their clients into Book A or B, on the basis of their trading history. Clients who more often lose money are put under Book B. Companies and B- Book clients are always of the opposite opinion, in other words their trades usually make it to the markets and brokers hedge against them. So when a customer loses, the broker wins and vice versa. It can happen that inexperienced or rash traders lose their deposit money in the first six months, therefore this earning model has been proved to be a viable earning stream for the spread betting companies. Spread betting companies don’t have an unlimited risk appetite and covering up B – Book client is a risk for them. So if the majority of their trading clients on some occasions are of the same opinion, it would lead to an imbalance and would go over the risk limits of the broker, therefore brokers would be required to hedge their risk to maintain it at a tolerable level. The companies don’t hedge against B – Book client until really required, as this could lead to higher costs and lowering of their profits.
Whereas, on other hand A- Book clients are the ones who are a reliable clients helping to generate repetitive source of commission. These clients are charged premium spreads or a customised fee as they get into large positons, mitigating the risks involved in B- Book clients. This creates a special bond between broker and A-Book clients as they act as a trust worthy bunch of customers.
Affiliated Trading Costs:
The main highlight of spread betting firm is that it allows its trades to hold position throughout worldwide trading day from opening of Asian markets to American market close but this comes at a cost to the customers as the brokers charges a holding fee to rollover the position for more than a day. Novice traders frequently neglect to consider this cost leading to a decrease in their profits. Therefore, this creates an opportunity for betting firms by limiting short positions of their clients.
The Right One:
So, now that you know how they make money. Your most important step as a beginner or novice in the world of spread betting or trading, is to choose the broker. Which company is the correct one for you. Where can you maximise the profit that you make, and where are your costs kept to a minimum.
One should take into consideration following points while closing down on a spread betting company: What do you want to trade? What level of customer support do you need? And where can you get the best value or lowest spreads?