What is a margin?
When you buy shares, you have to pay the full value of these shares before you own them. With spread betting, you only pay a small percentage of the value of the share, index, commodity or currency that you open a position on. The initial deposit you pay to open this position is called the margin.
When you trade with Spread Co, the minimum margin depends on the type of asset you’re trading on, and its price. To calculate the margin, just multiply the value of your position (your stake times the asset price) by the Margin Rate. Here are some examples of Margin Rates for different asset types.
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Margins and leverage
Although you’re trading on margin, you still have access to the same potential gains you would have if you paid the full price for the asset.
Getting the same exposure to potential profit but at a lower initial cost is known as using leverage.
Let’s say you think the price of Barclays shares is going to rise. You could decide to buy £1,000 worth of shares, which would cost you £1,000, plus any broker commission. If the share price rises by 5% you can sell your shares for £1,050 and make a £50 profit. Your profit is 5% of your initial outlay.
Alternatively, you could place a spread bet to give you exposure to £1,000 worth of Barclays shares. Our margin for UK100 equities is 5% so the cost of opening this position is £50 (£1,000 X 0.05). When the share price rises by 5% you decide to close your position. Again, your profit is £50, which represents a return of 100% on your initial outlay.
Leverage is one of the key advantages of spread betting as it gives you access to investment opportunities without making a large initial outlay. But you should always remember that potential losses can also be greater than your initial outlay.
Initial deposit margins and maintenance (variation) margins
As explained above, every financial instrument has its own initial margin requirement. This is the minimum amount of unencumbered funds (that is, money not used as margin on other positions) that you must hold on your account to open a position.
But markets can move quickly, up and down. This is why it is sensible to hold additional funds on your account. If you have an open position which begins to make a loss you will be asked to add funds to your account to keep the position open. This is known as a maintenance, or variation, margin.