spread betting

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If you are spread betting on the price of a share, and a dividend is paid, how does that affect your bet? The is one of our most frequently asked questions.

The short answer is that – contrary to what many people think – you do actually qualify for a dividend payment of the share if you have taken a long (buy) position, but this isn’t normally for the full amount, as a portion is deducted for the nominal amount of tax.

When do you receive dividends?

If you own shares in a company, you are entitled to receive dividends when they are paid out. They are generally, though not always, paid out twice a year in the UK as an interim payment and a final dividend, or four times per year in the US. You need to own the share before the ex-dividend date although you can sell it the following day. Note that on the ex-dividend date, share prices fall by an amount approximately equivalent to the dividend.

To clarify: the ex-dividend day refers to the day on which the stock starts trading after the value of the dividend has been removed from the price. It is usually one business day before the record date. The share price falls on the morning of ex-dividend day, normally by an amount equivalent to the dividend – although not always the exact amount as other factors can influence the share price too.

How does this affect my spread bet?

Although as a spread better you do not “officially” receive dividend payments as you do not actually hold the shares, dividend adjustments are made to your spread betting account to reflect a dividend. They are credited to long positions and debited from short positions that remain open at the end of the day before the ex-dividend day. Note that you might not receive a full credit or debit. Usually, long positions are credited 80%-90% of the dividend while short positions are debited 100% of the dividend.

  • If you have a long spread bet position, on the ex-dividend date you will be credited the dividend on your full open trade. Usually, your credit will be limited to 80% to 90% of the dividend.
  • If you have a short spread bet position, you will need to pay a dividend adjustment on the ex-dividend date. This will be debited from your account and will be for 100% of the dividend.

An example

Let us look at a couple of examples of how this works out:

  • WhiteElephant limited declares that it is paying a £0.10 dividend. At the close of the market, you have a £100 buy trade open, which is equivalent to 200 shares. Thus, your account will be credited by 90% of the dividend, in other words, 200 x 90/100 x £0.10  = £18
  • PinkElephant limited declares that they will pay a £0.05 dividend. At the close of the market, you have an £80 sell trade open which is equivalent to 150 shares, so your account will be debited by 100% of the dividend, in other words, 150 x £0.05 = £7.50

These examples apply to the UK and are a little different from other jurisdictions in terms of the percentage of dividends that are credited and debited. The reason is the UK tax law regarding dividends.

How to take advantage of dividends with spread betting

Wiley traders keep a close watch on corporate strategies regarding potential dividend payments and try to anticipate dividend announcements. With spread betting, there is a common misconception that you are not entitled to a dividend payment on a long position. However, whilst technically you are not entitled to a dividend as you do not own the share and are in effect just betting on its price moving up, most brokers will make a payment to your account to reflect the dividend – what is called a “dividend credit.”

You do not pay tax on dividend credits, although your broker will make a deduction of 10-20% from their dividend payment to you to reflect the notional tax rate.

There are various ways you can potentially trade around the ex-dividend date, which are explained in more detail in our article here.

 

 

The contents of this website are intended for educational and information purposes only and do not constitute any form of advice or recommendation and are not intended to be relied upon by you in making (or refraining to make) any specific investment or other decisions. Appropriate expert independent advice should be obtained before making any such decision. We cannot and do not offer individual investment advice.

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