Yes, and here’s why. Whenever you place a spreadbet, they will ask you for a deposit to cover any reasonable potential losses. This deposit much be posted right away, the same day you make the bet.
But how much does it cost to start financial spread betting?
The ‘cost’ of financial spread betting can be confusing to many people. But it can be looked at in three inter-related ways.
Firstly you need to be aware of minimum stakes, roughly speaking, the lower the stake you are allowed the trade for the ‘cheaper’ the service will be. This is primarily due to the fact that the margin requirement (the deposit you need to make to open and cover your financial spread betting positions) will be lower for lower stakes.
When you see that certain financial spread betting providers enforce a £2 minimum stake this will require a bigger margin payment. In other words, the higher the stake the more money you will need to invest to start financial spread betting.
Keep in mind though that the ‘stake’ is directly related to your earning and or losing potential, the bigger the stake the higher the potential profits or losses.
Let’s look at an example:
Suppose you want to bet £10 a point that the FTSE will rise by the end of the current 3-month trading period. This is called an UP bet. The FTSE is currently at (say) 4100. The quote for the future March price (remember, this may be unrelated to the current price of 4100) is 3930/3940. The 10 point difference is their spread and this is how they make their money.
As an aside, and just to make sure you have been paying attention, does this quote mean that the speculators (in general) are optimistic or pessimistic about the coming prospects for the FTSE?
They are pessimistic, of course. More people want to sell this future than buy it, and so the price has gone down to reflect this.
You decide that the FTSE will be far higher than this and so you BUY MARCH FTSE at 3940. If you were to sell three seconds later, you would sell at 3930 and the company would keep the 10 point difference. Get the idea? This is how they make their money.
You buy at £10 a point. The company apply a standard factors to this (for the FTSE) of 100 say and so ask you to deposit £10 x 100 = £1,000 which is payable immediately to cover your bet. The factor of 100 is just a reasonable guess at the amount the FTSE typically moves in a 3-month period. It could move far more of course, but on average it is unlikely and so the company consider 100 to be reasonable insurance against the bet going against you, and you defaulting on your obligations. This factor changes according to the present volatility of the market. Some spread betting providers will tie a default stop loss level to your position and they ask you for a smaller margin deposit if you put set a tighter stop loss.
If you bet £30 a point, you would have to send them £3000. Of course, if the bet goes your way, you get your winnings and your deposit back. If the bet goes against you, they keep the deposit (or proportion required) and either return the balance to you, or oask you for more money to make up the difference between your losses and your deposit.
The alternative would be for them to allow any old punter to wager £1000 and disappear (or go broke) if the bet went against them. That same punter would surface (under a different name, perhaps) a few months later, and make the same bet. Eventually the market would go his way, and he would make a million haha
If the market moves sharply against you (e.g. more than 100 points) they will telephone to ask for additional funds to cover your losses. You must be prepared to pay the ‘margin call’ (as it is called), or close out your bet and take the losses.
For sure you have to know what your doing with spreadbets. Most providers Capital Spreads offer practice accounts or silly money accounts to get started. Try them – the key is to start real slow and practice without money or very small amounts; .it can be a tricky business spreadbetting. For example, betting on the FTSE has a usual minimum of £1/point.