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Spread Betting: Leverage & Margin
If you were to buy shares in the traditional sense through a stockbroker or share dealing service you would have to pay the full purchase price of the shares
Summary
Spread betting is a geared product. Gearing has the effect of magnifying profits and losses. When the profits are considered as a percentage of the outlay, the spread bet offers returns that are many times greater than the ungeared physical investment.
You should always be aware of your total underlying exposure. With most spread bets your potential losses are not restricted to the deposit you put down. If you need greater security make sure you use an account with guaranteed stop losses to protect yourself in the effect of adverse market moves.
It is in your interest for your spread betting account holder to keep you aware of a position that is moving against you.
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With spread betting, you do not need to do this. Instead you typically put up only a small portion of the underlying value. This is known as your deposit or inital margin. Taking up a position of equivilant size (a bet of £50 per penny movement in a share equates to purchasing 5000 shares in the company). Your exposure remains the same in either case.
Spread betting is a geared product. Gearing has the effect of magnifying profits and losses. When the profits are considered as a percentage of the outlay, the spread bet offers returns that are many times greater than the ungeared physical investment.
Because it is possible to accrue losses that exceed the amount you deposit to place a bet (in the case of unlimited accounts) you may be requested to send more margin. This is also known as being on margin call. You can only be asked for margin on a position for which your deposit does not cover the total risk of the bet.
Deposits and margin requirements depend on what it is you are trading, you should check with your spread betting account to see what these are, but in general very illiquid or special cases will require more margin than liquid or heavily traded instruments.
Deposit factors are usually determined by the volatility of the market as well as the amount that exchanges demand for the underlying contracts you are betting on. Daily market bets usually have smaller deposit factors as the position will bbe held for a shorter time period.
It is in your interest for your spread betting account holder to keep you aware of a position that is moving against you. Margin calls should not be dreaded and most spread betters will behave in a responsible manner if/when you get to the stage you are on margin call. If you are on margin call and choose to continue your bet by paying the required margin to keep the bet open, any surplus may be removed when/if the position moves back in your favour. Be aware of your increased exposure and ensure you are comfortable with this before you carry on the bet
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