Spread Betting for Your Portfolio and the Concept of Margin - dummies

Spread Betting for Your Portfolio and the Concept of Margin

By David Stevenson

Spread betting is traded on margin, which means that when you open a trade you need to place a deposit of only a percentage of the position’s total value.

If a position moves against you, you may have to pay additional money over the initial deposit called a margin call. The spread-betting company requests this payment if your open positions are running at a loss. My advice is not to open positions that require all your available funds as an initial deposit.

To understand margins, imagine that shares in BP are trading at 450 pence per share. If you buy 1,000 shares it costs you £4,500 plus dealing charges; but with a buy spread bet by contrast you pay only £4.50 for £10 a point.

If the share price rises to 455 pence, you make a profit of £50 on the actual shares (1,000 x 0.05). But with a spread bet you also make a profit of £50 (50 points x £1).

In order to buy the actual shares in the traditional manner, however, you have to pay the full value of £4,500 before commission or stamp duty. With a spread bet, the deposit requirement (often called the margin requirement or notional trading requirement) is based on the value of the trade.

This margin requirement differs between different underlying assets and different spread-betting companies. With some spread-betting companies, the margin requirement for a stock such as BP may be 10 per cent, with the amount to pay upfront calculated as follows:

(£ per point x total number of points) x 10 per cent

That is:

£10 x 450 points = 4,500 x 10 per cent = £450.

Spread-betting companies accept your cash as a deposit or offer you a credit account where you have a set level of credit. Avoid credit accounts unless you’re incredibly confident and experienced and have an excellent track record. Betting using credit is a mug’s game.