Dividends are an important feature of share trading, with investors usually taking a keen interest in dividends, when they are to be applied, and how generous different companies tend to be in their declarations. As far as spread betting is concerned, traders don’t have the same luxury of the dividend yield as share investors, for a variety of legal and technical reasons. However, to account for the distortion in markets created by dividend declarations, spread betting brokers account for these payments in their transactions in order to establish greater market transparency. As a result, spread bettors still need to be comfortable with the concept of dividends, and in particular how they relate to the value of shares spread betting positions held over a dividend declaration.
When trading in shares, the companies that underline the market are of essential importance to investors and speculators alike. Companies that perform well and operate efficiently tend to attract a higher share price, whereas those that perform poorly tend to do less well in the share markets. One factor in determining this value is the dividend yield which shareholders generate, with a direct correlation between more successful commercial performance and more significant dividend payments.
Technically, spread bettors are not entitled to capitalise on dividends because the trader is not a shareholder, however there are mechanisms in place to take account of dividends factored in by spread betting companies. Nevertheless, understanding the role of dividends and how they are considered and treated for spread betting purposes is an important step towards factoring in dividend assessments when searching for potential trades.
How Is a Dividend Considered in Spread Betting?
While dividend payments themselves can’t be made to spread bettors, they are applied by the spread betting broker in credit (or charged in debit) to the position when a market goes ex-dividend. This means that spread betting traders can in reality benefit from the full extent of the dividend, albeit without actually receiving the dividend themselves. Dividends are computed on the basis of position size and are applied more swiftly to spread betting positions than actual dividends to legitimate shareholders. In practice, this serves to even out the distortion created by dividends in spread betting markets, and allows traders to plan strategies around dividends more effectively.
- Long positions: on the day your shares go ex-dividend, 80% of the gross dividend (check with your broker) will be credited to your account.
- Short positions: on the day your shares go ex-dividend, 100% of the gross dividend will be debited from your account.
Indices such as FTSE100 are made up of individual shares and thus they are also subject to dividend adjustments; it is important to keep it in mind when spread betting on indices.
Why Spread Bettors Aren’t Entitled to a Dividend
Share traders are in effect the owners of the companies in which they hold shares. They are entitled to influence in how the company is run at a strategic level and are ultimately entitled to share in the assets and the profits of the company as paid-up part owners. For many, this angle is to a certain extent irrelevant, because traders are considered more directly to be interested in speculating on the price of shares rather than taking an active involvement in the management and operation of the company. However, one clear perk is that shareholders receive a dividend payment, so traders can see a yield from buying positions around dividend declarations. In spread betting, dividends cannot be paid because traders do not own any shares and are therefore in no way able to influence the company or share in its profits – spread betting is merely using the index for a share market as the basis for a financial ‘bet’, which is why spread betting enjoys more efficient tax treatment and high degrees of leverage.