Spread betting leverage explained?

[Jane Goodwin]

[Justin Freeman]

The Leverage applied on spread betting accounts means that your positions, and the profits and losses made on the bets made are magnified. It works on the basis that the deposit of funds into your account acts as cover for the profits and losses that are made so the actual positions you are trading are scaled up in size. Traditional investing works on a ‘delivery vs. payment’ basis. A stock for example is bought outright in exchange for cash funds. A 10% increase in the price of the stock will see the value of your asset increase by 10%. If using leverage of 20:1 any stock position that increases by 10% will see your assets increase in value by 200%. Of course, losses are magnified in the same way hence the many risk warnings that are quite rightly publicized across the industry. Leverage can also impact your day-to-day trading as well as having the potential to very quickly blow your account up.The deposit made into your account collateralizes your trading but if you put on too many positions then that will ‘use up’ the margin. Your positions could even be in profit, but your broker will factor in that a change in market sentiment could see your positions move against you. If your broker calculates that the potential combined losses would exceed the capital you have deposited with them then they will trim your book. They could restrict you from being able to put on any more trades and in certain circumstances even kick you out of positions that you are already in. This is worth bearing in mind when planning your trading strategies. What works in theory has to work in practice. If your strategy is based on scaling up into a variety of positions then the ability to carry it out might be impacted if one of the early trades makes a loss. This would eat into the capital in your account and so the later dated trades would require extra margin to be deposited. Your sequence of ten trades may ultimately be profitable but if they fall in the following pattern: LLLWWWWWWW then you might not manage to get the last seven on to cover the losses made by the first three. Another reason to take on board the advice to trade small, stay small.