WHAT IS MARGIN IN SPREAD BETTING?
With spread betting, margin requirement is the amount you need to maintain each open trade on your account. An important feature of spread betting is that you don’t actually buy the underlying asset you want to trade.
Instead you take a view on the prices offered by a spread betting provider, such as Spread Co, as to whether the price will rise or fall. As you don’t have to buy the underlying asset, spread betting providers allow you to trade on margin. What this means in practice is that you only have to put up a small percentage of the value of the underlying asset to control a large amount of it. In other words, you are dealing with leverage. As a result, your potential profits are magnified, but so are your losses. For this reason, great care must be taken when spread betting.
Spread Co’s initial margin requirement (also known as the Notional Trading Requirement) is 5% for all shares in the FTSE100. This means that you could gain exposure to £1,000-worth of a FTSE100 stock with as little as £50. This can be very useful as you can make other uses of excess funds. However, it does mean that there is a risk inherent in spread betting: if markets move against you it is possible to lose more than your initial investment.
There are two types of margin in spread betting.
The first, is the Notional Trading Requirement (NTR). This is the minimum amount that you need in your account to open a spread bet and it varies depending on the financial instrument. Generally it is a multiple of the bet size. For example, with Spread Co the NTR for the UK100 index (FTSE100) is 25. So for a £1 per point bet on this market you would need £25 (£1x 25) of unencumbered funds (in other words, money not needed for other positions) in your account. It is important to understand that this is the minimum requirement. Markets are constantly fluctuating so it is important to have additional unencumbered funds available in the account to cover any adverse market movements.
This is where the second type of margin comes in. This is often called maintenance (or variation) margin. The maintenance margin works as a buffer to cover you against adverse market movements. If these additional resources were exhausted though a negative market move, Spread Co would get in touch and invite you to add additional funds to keep the position open.
There is no set requirement from Spread Co about how much maintenance margin you should have in your account to open a specific bet. This is something that you as a trader must consider, taking into account such factors as the volatility of the underlying market and how much you are prepared to risk on a particular trade.
FTSE 100 EXAMPLE
Let’s consider the FTSE100 which is the index of the top 100 UK companies by market capitalisation. Spread Co is constantly making a dealing spread, or quote, on the “UK100” as we call it, based on the underlying FTSE index. This quote consists of a selling price and a higher buying price. Here’s an example of a typical deal ticket:
The first thing to notice is the two trade buttons: the “sell” in red and the “buy” in green. The sell price is 6,261.6 and the buy price is 6,262.4. The difference between the two prices is the dealing spread which is the most obvious cost of spread betting. You sell at the lower price and buy at the higher price. The spread is always there, wrapped around the underlying market price. You pay half of the spread when you open the bet and half when you close it. The spread between the two can be as narrow as 0.8 points, which means that Spread Co’s charge for opening and closing a spread bet is one of the lowest available.
Let’s say you think the index will rise, so you “buy” £1 per UK100 point at 6262.4 - it’s very important to understand exactly what one point means, as it varies across different financial instruments. As far as the UK100 is concerned, a point is 1.0, so in this example, for each point the UK100 goes up, you will have an unrealised profit of £1. Conversely, for every point the UK100 goes down from here you’ll have an unrealised loss.
Markets can move very quickly sometimes, especially if a significant event happens or an important piece of financial data is released. Fortunately, there’s absolutely nothing to stop you closing your bet within seconds of opening it. At the same time, you can leave bets open for days, weeks, months, or even years in some cases.
Let’s say our UK100 falls soon after you open your position and our quote is now 6252.4 – 6253.2.
This means the market has moved against you. In this situation you have a running loss of £10 (that is, you bought £1 per point at 6262.4, and it is currently valued at a selling price of 6252.4 for an unrealised loss of 10 points).
Now, remember that you need to maintain the £25 NTR at all times to keep this position open. This isn’t a problem as long as you have sufficient funds in your account over and above £25 to cover this unrealised loss of £10. But of course there may be times when the market moves quickly and your unencumbered funds won’t cover the unrealised loss. At Spread Co we send you an automatic email if your account balance, including unrealised losses, falls so that you only have enough funds to cover your NTR. This email will alert you to the situation and invite you to deposit more funds as a buffer.
As mentioned earlier, the great thing about a spread bet is that you can close it out any time after you have opened it. This means you can take short, medium, or long-term positions. On top of this, spread betting providers like Spread Co make two-way prices on certain financial instruments, even when the underlying markets are closed. They charge a wider spread for this service, but it can be well worth it when you consider how world events and fresh news stories are moving markets all the time. Spread Co is open 24 hours a day, five days a week.