Margin And Leverage In Your Spread Betting Account
With a spread betting account it is normal practice to use margin as leverage on your trades. By using margin you only need to deposit a percentage of the actual position value. Each broker has their own margin requirement, in the main it is around 10% of the trade value but can vary across different types of instrument.
There are some brokers who will offer very small margin requirements. Whilst this seems good value as you can trade in larger size without as much on deposit, it also accelerates the risk involved. Trading in large sizes with little funds in a spread betting account is a sure fire way to lose your original deposit. Unless of course this is part of your well researched and pre tested trading strategy.
This does not always mean the brokers who insist on large margin are safer to trade with. Essentially the best broker for you is the one whose margin requirement will allow you to trade safely and in sufficient size to make your strategy work.
Losing Trades And Margin Calls
In the case of a losing trade placed on a spread betting account, some brokers initiate what is termed as a margin call. A margin call is either an e mail or phone call alerting you that your account balance is getting dangerously close to going negative, or your position being liquidated, because your margin on deposit is not sufficient anymore. This give you the option to either deposit more funds to keep the position open, or close out all or part of the trade for a loss. Usually this situation arises when a trader is not trading properly with stops and a correct trade size. The losing trade will eat up any funds in the account until it also starts to eat up the required margin.
New traders should be wise and make themselves familiar with margin and how it works. One of the biggest downfalls of a new trader is to trade in too large a size for the deposit they made. Quickly the balance is eaten away by a market that may only have moved 20 or 30 points against them. When you are starting out, trading in small size not only allows you to cover margin requirement on your spread betting account but also stops you getting stressed and emotional about a trade.