When spread betting, it’s important to understand the risks associated with financial trading in general, as well as the risks that are specific to spread betting. The main risks associated with spread betting relate to trading with leverage, account close-out, market volatility and market gapping.
Leverage gives you exposure to the markets by depositing just a percentage of the full value of the trade you wish to place. While you could make a profit if the market moves in your favour, you could just as easily make significant losses if the trade moves against you and you don’t have adequate risk management in place.
For instance, if you place a trade worth £1,000 and the margin rate for the chosen instrument is 5%, you only need to pay a position margin of £50 to open the spread bet position.
If, however, the price of the instrument moves against you by 10%, you lose £100 – double your initial stake in the spread bet. This is because your exposure to the market (or your risk) is the same as if you had purchased £1,000 worth of physical shares.
In this way, your profit or loss in comparison to your initial outlay is magnified when spread betting in comparison to buying the equivalent physical shares. However, retail client accounts have negative balance protection, so your losses will be limited to the value of the funds in your account.
See our spread betting guides to further your learning.
Market volatility and rapid changes in price, which may arise outside of normal business hours if you are spread betting on international markets, can cause the balance of your account to change quickly. If you don't have sufficient funds in your account to cover these situations, there is a risk that your positions will be automatically closed by the platform if the balance of your account falls below the close-out level.
You should continuously monitor your account and deposit additional cleared funds, or close your positions (or a portion of your positions) so that the funds in your account cover your total margin requirement at all times.
The information icon located within the account bar at the top of our Next Generation spread betting platform will detail all your account information, including the close-out percentage level.
Account close-out example: If the current close-out percentage level is 50% and you have four spread bets that each require £500 worth of position margin, your total position margin will be £2,000.
If your account revaluation amount then drops to less than 50% of the total margin requirement, in this case £1,000, some or all of the spread bets constituting this position may be closed out, potentially at a loss to you. The account revaluation amount is the sum of your cash and any net unrealised profit or loss (as applicable), where net unrealised profit or loss is calculated using the level 1 mid-price.
Risk management is an important aspect of trading. As a trader, it's important to remember that market volatility can sometimes cause prices to move from one level to another without actually passing through the level in between. Gapping (also known as slippage) usually occurs during periods of high volatility and can result in your stop loss order being executed at a level worse than you had requested, exacerbating your losses if the market moves against you. Guaranteed stop-loss orders can protect your trades against gapping or when the markets are highly volatile.
For example, crude oil spread betting is a risky market to trade in, as oil prices can fluctuate regularly in times of economic instability. This is similar to the stock market, as well as for trading of currency pairs. At CMC Markets, we offer a range of risk management tools, including guaranteed stop loss orders, stop loss orders and boundary orders. Find out more about gap trading.
Depending on the positions you hold, and how long you hold them for, we may require you to pay holding costs. These holding costs are incurred on a daily basis when you keep positions on certain instruments overnight (past 5pm New York time). In some cases, particularly if you hold positions for a long time, the sum of these holding costs may exceed the amount of any profits made on the position or they could significantly increase losses. It's important that you have sufficient funds in your account to cover your holding costs.
Find out more about the advantages of spread betting and how to get started.
FAQs
Spread bets can last from a few seconds, to a day, to several months, depending on the market and instrument that you’re trading, and whether you’re going long or short. Please note that at the end of each day, positions held in your account may incur holding costs, which can vary due to the direction of your position and the particular asset. Read more about our spread betting holding costs.
It’s possible to make a living from spread betting, by trading at home. You should ensure that you have sufficient funds to support your account in case of losses or account close-outs, and devise an appropriate trading plan before opening any positions.
Our online trading platform requires clients to trade with leverage. This makes the financial markets more accessible, as you can place a trade with an initial deposit, or margin. However, leveraged trading means your profits and losses are magnified to the full trade value, so we recommend taking advantage of our risk-management tools, like stop-loss orders and other order types. Learn more with our money and risk-management guide.
Spread betting and contracts for difference (CFDs) are very similar derivative products in the way that they are traded and the use of leverage. However, there are more costs to pay when trading CFDs, such as capital gains tax. Please note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK. Read more about the differences between spread bets and CFDs to find out which product is better suited to you.
In spread betting, a margin call is when the trading account value falls below the maintenance margin requirement. This means that you will need to either deposit more funds into your account, or close your trade/s in order to compensate for the margin level. We notify clients so they have the chance to rectify the account, otherwise the trade/s will be at risk of an account close-out. Open a spread betting demo account to start practising.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
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