Indices · What trading indices costs · lesson 2 of 9 · 6 min read · David Alexander
What an index spread actually costs
spread cost
The spread converted into money: points wide, multiplied by what a point is worth to your position. It is charged once per round trip, paid at the moment you open, and it is the reason a position starts behind rather than level.
Module 1 taught what the spread is and what it is quoted in. This is the arithmetic that turns it into a number you can compare against anything else.
The conversion is the whole lesson
Spread in points, times the money value of a point for your position. That is it. The difficulty is never the sum - it is that platforms quote the spread in points and your account is in money, so the comparison never happens.
Worked example
figures in USDA 1.6-point spread on a dollar-settled index at $5 per point, in a US dollar account. No conversion.
- The quote is 1.6 points wide, and you hold 1 contract at $5.00 per point.
- One point is $5.00 to you, so the spread is $8.00.
- That is the position's starting deficit. The index has to move 1.6 points in your favour before the trade is level, and it has not moved at all yet.
Why a tighter spread is not automatically cheaper
A 1-point spread on a contract worth £10 a point costs £10. A 2-point spread on a contract worth £1 a point costs £2. The wider quote is five times cheaper.
This is why spreads cannot be compared between vehicles, or between brokers offering different contract sizes, without doing the conversion first. The unit hides the number that matters.
When it is widest
Module 2 covered where: outside the cash session, around the open and close, through announcements. The cost consequence is that the same trade placed at 03:00 and at 13:00 is not the same trade, and the difference is not small on a thin index.
What it is not
It is not the whole cost. On a position held overnight it is often not even the largest one, which is the next lesson.
Check your understanding
Question 1 of 2
A 1-point spread on a £10-per-point contract, against a 2-point spread on a £1-per-point contract. Which costs more?