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How do I Spread Bet?
Spread Betting makes it possible for you to trade equities, indices, foreign exchange, commodities and bullion from one account, and you do not need to pay the full value of these underlying instruments in order to do so. Some of the main features of placing Spread Bets are set out below.
Margin Requirements
Spread Betting is traded on margin. This means you can spread your capital more efficiently over a larger portfolio. The margin required for executing a Spread Bet which has no guaranteed stop order attached to it is calculated by reference to two variables:
- Notional Trade Requirement (NTR)
The NTR is a risk factor applied to each underlying financial instrument which varies according to the instrument’s liquidity and volatility.
The NTR for equities is a percentage of the notional value of your trade. The NTR for other instruments is a risk factor applied to the relevant instrument. See the Market Information for details of the actual NTRs.
- Stake
Stake is the amount you wish to trade per point. For example, £1, £3 or £5. Once you have chosen your stake amount, you can find out the margin requirement for your Spread Bet.
For example, you want to buy Spot Gold with a stake of £2 per point and the NTR for Spot Gold is 100. The margin requirement for this Spread Bet is £200 (2 x 100).
The stake will also determine how much you will make or lose for every 1 unit movement in the price.
For example (continuing the above example), you buy Spot Gold at 800 with a stake of £5 per point. The price of the Spot Gold then rises to 810. If you close your Spread Bet at 810, you will make a profit of (810 – 800) x 5 = £50 (assuming no buy / sell spread for the purpose of the example).
However, if the price of Spot Gold drops to 790 instead of rising to 810, you will make a loss of £50 [(790 – 800) x 5].
Margin for Indices, Foreign Exchange Currencies, Commodities and Bullion Trades
The margin requirement for Spread Bets without guaranteed stop orders is calculated differently from those attached with guaranteed stop orders.
The margin requirement for Spread Bets (except equities) without guaranteed stop orders is calculated by multiplying the NTR by the stake.
On the other hand, the margin requirement for Spread Bets (except equities) with guaranteed stop orders is equal to the maximum loss that you can incur on that trade.
Example - Margin for UK100 Trade (no guaranteed stop order)
UK100 is trading at 6000/6001. NTR for UK100 is 50.
Margin required= NTR x stake
= 50 x 5
= £250
Example - Margin for UK100 Trade (with guaranteed stop order)
UK100 is trading 6000/6001. NTR for UK100 is 50.
You stake £5 per point to buy UK100 at 6001 with a guaranteed stop order to sell at 5970.
Margin required= NTR x stake
= 50 x 5
= £250
However maximum loss on the position = (5970 - 6001) x 5
= -£155
Therefore the margin required for this position will only be £155.
Margin for Equity Trades
The margin requirement for equity Spread Bets without guaranteed stop orders is calculated by multiplying the NTR by the stake by the trade price for the relevant equity.
The margin requirement for equity Spread Bets with guaranteed stop orders is equal to the maximum loss that you can incur on that trade.
Example - Margin for a Vodafone trade (no guaranteed stop order)
Vodafone is trading at 200.00/200.01. NTR for Equities is 10%.
You stake £5 per point to buy Vodafone at 200.01.
Margin required= Trade price x stake x NTR
= (200.01 x £5) x 10%
= £100.01
Example - Margin for a Vodafone trade (with guaranteed stop order)
Vodafone is trading at 200.00/200.01. NTR = 10%.
You stake £5 per point to buy Vodafone at 200.01 with a guaranteed stop order to sell at 185.00.
Margin required= Trade price x stake x NTR
= (200.01 x £5) x 10%
= £100.01
However maximum loss on the position = (185 – 200.01) x 5
= -£75.05
Therefore the margin charged for this position will only be £75.05.
Margin call
You will receive a margin call notice when your account valuation is lower than the total margin requirement for all your open trades. A margin call notice will advise you of the amount required, which you can achieve by topping up your account or to closing part or all of your open trade. See an example of a margin call.
The purpose of a margin call is to inform you that the funds in your trading account are insufficient to support all of your open trades and you are required to top up your account. Alternatively, you may want to close part or all of your open trade(s) (this lowers your margin requirements). You should respond to margin calls as soon as possible to prevent liquidation of your open trades.
Note: No margin calls will be sent to holders of Limited Risk Accounts even if the trading resources of the account fall below the margin requirement. This is because each open trade has a guaranteed stop order. This means, as the holder of this type of account, you will have the funds available in your account up to the level of the guaranteed stop order and will not be exposed to any further risk.
Account valuation
Your account valuation is the approximate value of your account if you were to close all of your trades and withdraw all of your funds.
Account valuation = cash balance +/- open Profit & Loss +/- closed Profit & Loss
Open Profit & Loss is the real time value of the profit/losses on your open trades while closed Profit & Loss is the day’s realised profit/losses.
Trading resources
Your trading resources are the cash available for opening new trade or for withdrawing. They are the funds remaining after deducting the margin requirements for your open trade(s).
Trading resources = account valuation - margin requirements
Liquidation
Your open trade(s) will be liquidated (i.e. automatically closed by us) if your account valuation falls below the margin level which is required to support your open trades. Liquidation will usually start with your open trades which require the largest margin requirement and will stop only when your account valuation is more than or equal to the margin requirement.
How to Calculate Profits/Losses
To determine your profit or loss, simply multiply your stake by the difference between the opening price and the closing price of your trade.
Example 1 – Profit
The price quoted for Spot Gold is 900/901
You believe that the price of Spot Gold will rise and you decide to go long. You decide to buy Spot Gold at 901 with a stake of £5 per point.
The NTR for Spot Gold is 100 and margin required for this trade is 5 x 100 = £500.
£500 will be utilised from your trading resources.
The price of Spot Gold subsequently rises to 920/921. You were right to buy as the price of Spot Gold has risen higher than your opening trade price.
You decide to close this trade and realise your profit at 920. Your profits from this trade are (920 – 901) x 5 = £95
Example 2 – Loss
The price quoted for Spot Gold is 900/901.
You believe that the price of Spot Gold will rise and you decide to go long. You decide to buy Spot Gold at 901 with a stake of £5 per point.
The NTR for Spot Gold is 100 and margin required for this trade is 5 x 100 = £500.
£500 will be utilised from your trading resources.
The price of Spot Gold subsequently drops to 880/881. You were incorrect to buy as the price of Spot Gold has fallen lower than your opening trade price.
You decide to close this trade at 880. Your losses from this trade are (880 – 901) x 5 = -£105
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RISK WARNING: Contracts for Difference, margin Foreign Exchange trading and Spread Betting carry a high degree of risk to your capital and it is possible to lose more than your initial investment. Only speculate with money you can afford to lose. These products may not be suitable for all investors, therefore ensure you fully understand the risks involved, and seek independent advice if necessary. Please see the Risk Warning.