Spread betting comes as a leveraged investment. This means that you won’t need to put the full value of your investment in order to make a deal. The idea of spread betting is quite different from the conventional application of share trading wherein, if you want the benefits of your shares, you will need to pay up the full amount of the shares upfront. While it’s simple, it’s also expensive and totally inconvenient, especially if you are new to the market.
With spread betting, however, you will just need to invest in a fraction of your share value to open up your trading. It’s dealing with leverage. However, the process is not completely risk-free either. Even if you are actually putting up a fraction of the cost, you still are exposed to the share’s full value. This would mean that there is always a chance to lose more than your initial value of investment. This is where companies like ETX Capital come in to help you with your spread betting investments.
What’s your margin?
The ‘margin’ of spread betting is another way of gaining leverage. Margin simply would refer to the value of your funds that is needed to open an account and maintain your spread bet. This comes in two forms:
- Initial margin, which is the minimum amount of money you will need to put up your position.
- Maintenance margin, which is any additional money you put up to keep the position open.
The initial margin is sometimes also referred to as the deposit margin or simply ‘deposit’. The general rule of thumb says that the more volatile is the market, the higher will be your initial margin.
Maintenance margin on the other hand is the amount of equity with your position. It’s the total money that you have invested minus/adding the running profits and losses.
When the market seems to move away, or in other terms, the maintenance margin gets higher, you will need to allocate extra funds to continue your equity to be able to fund the present value of your position. This will also include any running losses.
Similarly, when the equity level decreases, then you might be able to close positions in order to reduce the amount of funds required and not allowing your account to run towards ‘negative’.
The requirement of maintenance margins
Maintenance margins depend on:
- The market you are investing in
- The size/value of your position
- The number of stops in place
Guaranteed stop margin:
This is the margin required for your spread bet to be equal to the risks.
Non-guaranteed stop margin:
Best that are attached with non-guaranteed stops are always liable to slippage, adding to the margin requirements. Adding to the ‘risk margin’ is also a ‘slippage margin’ that is calculated as the percentage of the position in case you needn’t have had to stop at all. This percentage will highly depend on the market. Mostly, for Forex bets, it is about 5% and for shares, it is about 30%. You can check out this percentage with your service provider like ETX Capital.
Calculating your margin
When you are spread betting with your Forex or shares or IG, the margin is calculated as the percentage of your position. Every market will have its own percentage. For instance, the Tier 1 Forex rates can be around 0.5% while it may increase it to 7.5% if it is about bitcoins.
It is always advisable that you understand the several factors that can influence your spread betting returns to be able to come up with a good return from the market.