Making money from spread betting is definitely not without its risks, and the attraction of relatively small sums for a large exposure can also lead to substantial losses. Spread bets are a leveraged trading product – that means that while you can make big profits you can make big losses too.
Ouch! A £300mil Spread Betting Lesson The Mirror.co.uk recently reported on a monumental spread betting loss for Football Tycoon, Mike Ashley. He had placed a £800k per point bet on HBOS with IG Index, and lost £300 million in the recent crash of the bank’s stocks. So next time you have a spread betting loss that hurts your wallet and your ego, be thankful you didn’t loose £300mil! Also, it’s worth remembering that when you get into spread betting, you have to be rational, cool-headed, and leave your ego/greed out of it.
With some spread betting providers requiring deposits from as little as 5% of the equivalent direct investment value, it needs little more than a small move in the stock price in the wrong direction to leave a glaringly obvious hole in the investor’s pocket.
Also, spreadbets are commonly used as a speculative tool for very short-term trading and as such is higher risk, especially for short spread bets which carry unlimited downside.
There are various risks involved, notably losing all of your money, savings and investments. Below are some potential risks and tips on how you can potentially buffer yourself against them.
- It is easy to lose huge amounts of money by spread betting, so it is important to limit your bets to the amount you can afford to lose. You may also need to limit your exposure from day to day.
- Every time you place a bet you need to find a level at which you admit you were completely wrong and cut your losses, if you don’t you could lose more.
- Research the markets that you are about to bet on to see how much you could potentially lose. However, as the markets are still volatile, it gets harder to predict.
- If you are winning, remember that your luck could run out. Don’t get over confident and stick to the level you have set yourself.
Tell me more about the risks…
Since financial spread betting is a leveraged trading product there is a risk that you may lose more than your initial investment i.e. more than the amount of funds you hold in your account. This is because while you only have to deposit a small margin to trade, your real exposure is still represented by the full value of the trade.
For instance, if you were to place a £10,000 spread bet on XYZ company and there is a margin rate of 10%, you would need to deposit only £1000 when opening your position. However, the real exposure of your position remain equal to the value of the trade i.e. £10,000. Should the market move against your position, you run the risk of losing in excess of the £1000 initially deposited and may thereby need to put more funds at short notice to keep your position open. For this reason, spread betting is not suitable for everyone.
The downside to leveraged trading is that it works both ways. Whereas 5x leverage can double your money on a mere 20% rise, it can wipe you out on a mere 20% fall.
Let’s take another example – in this instance we want to mimic the act of buying around USD5000 worth of silver. You can trade silver on spread betting sites like Capital Spreads amongst others.
- If you don’t leverage up then it’s identical to holding the silver really, bar the risk of the whole financial system melting down and Capital Spreads ceasing trading!
- If you buy physical silver, you still have the asset even if it loses value.
- If you spread bet and lose 5K you have nothing.
- If you use leverage you could lose 5K very quickly with large intraday moves in the assets price.
- Also, the risk with spread betting is that the asset declines more in value than the 5K your using i.e you lose 6K. You’ll be on the hook for that.
My positions at present are all leveraged – so I need to react and adjust them quickly. If I don’t, I get clobbered and it serves me right.
A way to manage your risk is by using stop loss orders. This is an order to automatically close a position should the market hit a specific stop loss level. Thus a stop loss order on a stock would mean that the bet would be automatically closed if a share price reaches a certain level. For example, if you have a ‘buy’ position on company ABC at 150p and want to make sure that should the trade move against you, your losses are cut at 120p, you can use this facility to achieve this. Should the price of ABC company fall to 120p, your spread bet would be automatically closed to prevent losses from escalating.
Having said that, the best way to safeguard your capital is to make sure you don’t take on too much leverage. Never bet money you cannot afford to lose – you really have to be disciplined when working with leverage.
Is it not the case that with a spread betting account that there is a risk that spread betting providers will close you out if your available margin is exceeded or could you literally end up owing them a shed load of money which is not even in your account?
As far as I am aware you can lose more than is in your account unless you have a ‘limited risk’ account. For example if you have a rolling trade and your bet opens up with a big gap against you, without a guaranteed stop they will stop you out at the opening price, so a big gap could mean a big kick in the nuts. To lose your House and contents you would need to be putting on big £pp bets.
Financial spread betting and trading the stock markets in general are inherently difficult activities and even the best spread traders are likely to suffer losses from time to time. Thereby it is crucial to consider how much you are willing to risk on a spread bet and in particular how much you are willing to stake. By doing this you are able to set your stop loss orders in line with your expectations and in the process take into consideration your worst-case scenario before you even open the spread betting trade.
Spread betting is a tax-free but it is a high-risk way of playing the financial markets. You can lose more than your initial investment – and you can lose it fast if you aren’t careful! However, no one is putting a gun to your head and making you pull the trigger. If you can’t handle a ‘machine gun’, then don’t touch it. Simple. Stop your whining and skill up on how to use the “machine gun” properly. If you want to make easy money, spread betting is not for you.