A stop loss is an essential tool in the spread betting punter's armoury. Stop losses enable the punter to limit the downside if a market moves against them. Unfortunately they sometimes fail.
To explain the stop loss, assume you were to buy the daily spread on the FTSE 100 at 5760-5770 and the market fell to 5700 by lunchtime. At £1 a point your loss would be £70.
However, if you set a stop loss at 5730 the bet would only lose £40 because the spread betting company would close your bet at 5730. The only disadvantage is you would miss out if the market subsequently rallied.
However, stop losses do not always provide a guarantee. Sometimes financial markets move so violently that they create what is called a "gap" which can mean you lose more than your stop loss would suggest. A good example of this is what happened with retailer Next in January.
On January 3 Next shares closed at £15.23. Many Finspreads clients had sold the spread in anticipation that the Next share price would fall and had kept their bets open overnight.
Unfortunately for them, on January 4 Next produced a trading statement nothing like as bad as the market had expected and the company's shares opened at £15.87.
That creates the sort of gap that could destroy a stop loss. Let's assume our punter had sold Next for £2 a point at, say £15.23 but decided to put a stop loss in place at £15.40. That should mean that if the shares were to rise, their bet would be closed at £15.40 and they would lose only £34 (£2 a point times 17). However, because the shares opened at £15.87 the stop loss would not have had a chance to kick in (because of the gap) and the bet would have loss 64 times £2 or £128.
Some financial spread betting companies will, however, allow clients to take a "guaranteed" stop loss. In these circumstances, any loss created by the gap is borne by the spread betting company.
However, there is a premium to pay for the guarantee. For FTSE 100 stocks, premiums are 1pc of the value of the share times your stake. So, for example, with the Next bet it would have been 15.23p (1pc of £15.23) multiplied by the size of your stake. For bets on the FTSE 100 index, it is twice the size of your stake.
Angus Campbell, Finspreads' market strategist, said: "Clients have to decide whether placing a guaranteed stop loss is worth paying the small premium. We offer the facility across most of our popular products and find clients like to have the extra protection, particularly in markets such as the Nikkei or currencies."
