Cost and Margin Requirements
How much does a spread bet cost?
When placing a spread bet the only costs involved are included within the spread, so effectively the wider the spread the more expensive it is to trade.
How much money do I need to place a bet or trade?
Spread betting is traded on margin, which means that you simply need to place a deposit when you open a trade of only a % of the positions total value.
If we compare a spread bet and an underlying share trade a Buy bet on Vodafone at 1.30 for £1 a point is the equivalent of buying 1000 shares at 1.30, if Vodafone rises to 135 bid you would make a profit on the shares of £50 (1000 shares x 5p) with a spread bet you would also have made £50 (5 points x £1).
However in order to buy the actual shares in the traditional manner you would have to pay the full value of £1300 before commission or stamp duty. With a spread bet there will be a deposit requirement based often called margin requirement or notional trading requirement on the value of the trade this will differ between different underlyings and different spread betting companies eg.
The margin requirement on Vodafone is 10% and the amount to pay initially is calculated as follows (£ per point x total number of points) x .10% i.e. £1 x 130 points = 1300 x .10 = £130
Therefore, to open a buy bet on Vodafone at 130p for £1 a point it would require an initial deposit of at least £130
Spread betting companies often offer two types of account a deposit account where you have to have enough money to cover the notional trading requirement on your account or a credit account where by you have a set level of credit against the notional trading requirement. However margin requirement per stock will be important as it will ascertain what size bet that you can open.
Margin Call
If a position moves against you, you may have to pay additional money over the initial deposit this is know as margin or margin call and will be made by the spread betting company if your open positions are running at a loss over and above the . It is therefore advisable that you do not open positions that require all your available funds as an initial deposit or you may be forced to close your position if you can not pay the required margin
Stop and Limit Orders
It is possible to set certain levels that if reached will automatically open or close a position .
Limit Order
A Limit order is one that is executed at a better price than the prevailing price, ie for a buy bet when the stock drops to a certain level or for a sell bet when the stock rises to a certain level.
Example: The FTSE spread is currently trading at 4400 – 4406
Investor A wishes to place a £10 a point trade with a limit of 4390, therefore they do not wish the order to be opened unless the FTSE spread offer reaches 4390.
This order is held by the spread betting company
Two days later the FTSE spread is 4384 – 4390 and an opening trade of £10 a point is opened at the limit level of 4390.
Stop orders
A stop order is one that is executed at a worse price than the prevailing market price one of the most common uses of this is a stop loss order. It is possible to make substantial profits when placing spread bets as well as substantial losses which is why many spread betting firms allow you to place a stop loss when you open a trade:
A stop loss is a price level set by the client on a particular trade that if reached automatically closes out the particular position at the desired price.
Example: Barclays is trading at 515 – 520
Investor A and Investor B both believe that Barclays will rise and both place a buy bets at 520 for £10 a point. However, Investor B also places a stop loss when he opens the trade at 500.
The following day Barclays drops steeply during the day trading down from 515 to 450.
Investor A has not been watching the price of Barclays all day and therefore when he checks the price at the end of the day it is now 450 – 455 and he is running a £700 loss (70 points x £10). Investor B has not been watching the market either however his position has been automatically closed out at his stop loss level of 500 limiting his loss to just £200 (20 points x £100)
A stop order can also be used to open a trade for instance if you wished to place a buy bet you may wait until a stock was moving in the right direction and set a level higher than the prevailing market price. |
