Each trade that you initiate has a value. One of the advantages of financial spread betting is that you do not need to put up the full value of the trade to open the position. The amount of money you do need to open the trade is known as 'Margin'. Each trade has a 'Margin Requirement'. You may have read or heard that you can begin spread betting with as little as £10. This is simply not true since all spread betting companies require a Margin 'deposit' for any trade to be initiated.
Margin trading is sometimes referred to as leveraged trading or gearing up)
The maximum position size (bet) you can trade and the number of trades you can have running consecutively will depend on your available 'margin'. Margin can be money you have lodged with the trading company to set up your account or it can be credit they have allowed you.
So when you open your account you will probably need to pay in a sum of money (margin) to trade from, how much you put into your account is up to you.
TERMINOLOGY TO REMEMBER -:Each spread betting company's Margin Requirements are different in values but similar in structure. They are often worked out as a percentage of the value of the bet or have a fixed amount. The amount of money you place in your trading account together with any credit you may have been granted is your trading margin.
When calculating the margin requirement for a spread bet, you will multiply the price by the quantity and then multiply this by the margin percentage for that market. For example, Barclays are trading at 230 and a provider may offer a margin of 5%. If you bought £10pp then the margin required will be: (230*10) * 5% = £115.
Different trades require different amounts of margin. So for instance, let's assume that your spread betting provider has an initial margin of 200 for the FTSE 100 (meaning that your provider requires 200 times your position to enter a £1 point bet) whereas Bovis Homes, a FTSE 250 company has a margin of 50 times your position size.
Let's look at those as examples.
If you wish to trade £10 per point on Bovis Homes, you will need approximately £10 x 50 = £500 of margin available in your trading account.
If you wish to trade £10 per point on the FTSE 100 index you will need £10 x 200 = £2000 of margin.
If you wish to trade small position sizes you will not need as much margin. A £1 per point a bet on FTSE 100 would require £200 in margin. You get the idea.
Let's have a look at some more examples -:Remember to check exactly what a point means. Typically in the above examples a point on the DOW is 1 index point - a point on a U.S.A. share is 1 cent and a point on gold may be 10 cents. Please read your manual carefully and, if you are in any doubt, contact the Help Desk or consult the On-Line Dealing Manual.
As can be seen from the above examples, trading on margin enables you to open a position without 'putting up' the full value of the bet. This is what is known as leverage, i.e. you get the effect of the full value of the bet for a limited investment - BUT NOT LIMITED RISK! Please note that the lesser the margin requirement - the higher the leveraged position.
Let me stress that this does not mean you have spent or lost that money, it is simply allocated to that trade until you close it. Regard this as the trading company helping you to trade within your means.
If your trade goes into profit, that profit is notionally added to your margin so if your £10 position on the FTSE 100 goes up to £200 in profit your margin will be restored. The proportion of your total margin that is attributable to your open positions is sometimes called 'Variation Margin'.
So your total margin can be said to be -:An interesting point to note here is that different spread betting companies treat margin requirements differently once the position is open. For example, some companies will require the margin to be available for the duration of the bet with no regard to the profit or loss situation with your position, so you will always have the same margin requirement. Others will eliminate the need for a margin once the position has become profitable and a stop order has been placed at the entry point of the bet, i.e. you cannot lose any money. Please fully understand the margin rules as laid down by your chosen spread betting company to avoid any nasty surprises.
So you can see that if you have open positions, your available margin can change constantly by the balance of your open positions. This means that as your positions increase in profit more margin becomes available. Conversely, if your open positions go against you into loss and you let those losses increase, you can run out of margin.
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