What are the Risks?
As a margined product, the exposure of your spread bet position is considerably greater than your initial deposit amount.
This means that you could lose more than your initial deposit amount if the trade moves against you.
Whilst margin is one of the key benefits of spread betting – enabling you to magnify your profits by paying only a small initial deposit – it also presents significant risks.
At Finspreads we provide powerful risk management tools such as guaranteed stop loss orders (GSLOs) to help you to manage your risks and maximise your trading potential.
In the following sections, we explain the risks involved and how you can limit potential losses through three easy-to-follow steps.
Finally we show you, through our tailored Limited Risk Account, how you can guarantee that you never lose more than the funds you deposit into your spread betting account.
Section 1: What are the Risks?
As a margined product, spread betting sees you gain exposure to large positions (whose total trade value is much greater than your initial deposit) through trading the global financial markets.
Trading Example: Vodafone Shares
For example, let’s say that you want to place a spread bet on Vodafone shares and we currently charge a 5% margin for this market.
If Vodafone is trading at a price of 188p and you go long and place a buy spread bet with a stake size of £20 per point, the total value of the position – or ‘true exposure’ – is £3,760, i.e. your stake multiplied by the share value (£20 x 188p = £3,760).
However, as we offer Vodafone shares with just a 5% margin, you can trade this market for only an initial deposit of £188.
So whilst your initial deposit is just £188, the true exposure of your position is £3,760 and, therefore, if prices move against your spread bet, you could lose more than your initial deposit amount.
This is the key risk with spread betting.
Tip: Most traders encounter a loss at some point in their trading experience. The key to trading is limiting these losses by managing your risk efficiently and utilising the full range of risk management tools available to you as a Finspreads client.
