Spread betting is a leveraged product
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.