Spread Betting with Smaller Stakes or Limited Funds

Q. I don't have the finances to do it for real...is there a simulator account I can use?

I know a lot of people do not like demo accounts but I don't have the finances to do it for real yet. I need an account which is (a) free and (b) does not have any time limits on it and (c) reliable.

A: Try Ayondo which offers a very simple interface, great for testing strategies and becoming familiar with the levers and throttles. Otherwise if you want to try the functionality/excitement of the real thing with limited you might want to open a real money account at ETX Capital who offer a limited risk deposit account where you can't lose an amount in excess of the funds you put into the account.

Q. How much is a reasonable amount to start out with (£50, £100)?

A: For share dealing, it is simply not feasible to invest less than 1,000 to 1,500 a share due to dealing charges and market maker bid/offer spreads. This is actually what one novice share trader said to me not so long ago; 'I was not confident in what I was doing and trading £500 per deal, it was like p*ssing in the wind after the trading fees etc, you have to get such big moves %wise to make any money. I now buy between £1500 and 4k per deal and it's a lot easier. If you buy say 4k per share deal, then even with a few % move the costs are covered and you make money.' Personally I think the minimum you can hope to trade per company with normal shares dealing is 1.5k, smaller than that taking out costs...etc and a few losers your winners are going to have to be double baggers to just make up the difference, the markets are a tough gig and even tougher with limited stakes.

Even for spread betting £50 or £100 would be a bit on the low side since the deposit is just an initial margin requirement and you may be required to deposit more if the market moves against you - the margin amount will depend on the financial instrument and the distance to your stop loss level (which is the level at which you will be stopped out if the trade goes against you). Also, you can't just select a stop loss level in accordance to the money you can afford to risk, you have to find key resistance/support points and this will also depend on the timeframe you are trading i.e. the period on to which you expect to continue holding a position. For instance if you're swing trading and letting trades run for weeks you will need wide stops and larger deposits and therefore a bigger account balance (and the opposite for shorter-term day trading).

Also, psychologically, you don't want to feel you are risking too much of your account per trade, and in practical terms too, you don't want to be in a position where 5 losses in a row will break you. Being under-capitalized in spread betting is a death knell. So really I feel £50 or £100 is too low even for a spread betting account - if I were you I would save money until I have about £2500/£5000 which would be a much more realistic starting point. Of course you can always open a practice account which is pretty good but just be aware that its easier to make money on a demo account as it lacks the pressure that comes with dealing with real money.

Q. Is it okay to spreadbet with £2k?

A: Your pot is a little too small to work properly. Although with £2000 in a spreadbetting account I believe it is probably sufficient to trade with provided you use leverage sensibly. You can certainly get more exposure with spread betting by leveraging your funds but I'm always wary about advising people to begin their trading career using a margin traded product. It can be dangerous and it is generally better to come to it once you have had a basic grounding in non leveraged trading. The problem with normal shares trading when trading in small sizes is that the dealing costs and stamp will kill you.

What you can't do with just £2k capital is run a portfolio of anything like we would usually do with 10-20 stocks. And you would have to forget about investing and learn to trade (say swing trading). You would also have to forget AIM penny shares and concentrate on the shares with good liquidity, good history and tighter spreads. For instance £1pp on a £5 share would be the equivalent of buying £500 worth of shares (to get the equivalent share value you need to add 2 zeros to your stake). So it would be OK to trade up to four £5 shares at £1pp.

For instance taking 3 random trades:

GEMD short from 3pts stake (300 shares) at 219p SELL to current 189p...profit £90
IPF long from 2pts stake (200 shares) at 288 BUY to current 309...£42 profit
FCSS long 6pts stake (600 shares) at 110 BUY to current 123...£78 profit

So with £1884 staked you would be £210 up. Having said that the smaller the trading pot the better off you are with spreadbetting providing YOU DON'T ABUSE LEVERAGE and gamble with money you don't own. You don't have to use the leverage. I run a large portfolio of stocks on spreadbetting but always try to keep value of shares = to my cash account value. Even when I trade the FTSE index at £40pp I cover it with cash.

Q. The minimum bet/risk per trade for the market I want to bet on is too steep...

A: You will find that most spread betting providers require a £1 minimum stake - if your provider enforces a higher minimum you probably need to seek another spread betting company. You can also try going for a spread betting account in another currency; the idea here is that if the stake is one unit you can get a lower entry level with let's say one Swedish crown.

However you might also want to try the following tactic to reduce your risk/exposure. I cannot guarantee that this will work with your provider but it worked with IG although according to their staff, what we are doing here is not possible -:

Suppose you wanted to enter a long USD/EUR trade at 13242 with a stop at 13800. This means the distance from the stop is 558 points. The minimum bet is £0.50 on this market, so if you multiply 558 by £0.50 you get a trade risk of £279. But suppose you only wanted to risk £200...

This example assumes that the entry price is the same, which is 558 points away from the stop. Simply open the trade short at the minimum £0.50 per point and then divide risk per trade (say £200) by 558 = £0.35. Therefore, we need to part close £0.15 per point as our actual bet size should be £0.35 and not £0.50. This is because the minimum bet size on this market is £0.50 but in this case we only want to bet £0.35 per point.

To part close £0.15 per point go to the trade you have just opened and select close trade. You then change the amount showing in the amount box, which in this case will be £0.50 and enter £0.15. Then press buy. This will part close £0.15 per point and if you look at your account it will now show short at £0.35 per point. The only downside to this is that you lose a little bit of spread commission.

Note: To part close a trade you always part close in the opposite direction to the trade that you are in. In this example we are short, so to part close (i.e. reduce our trades size you would buy to part close). If we were using this on a long trade, you would sell to part close.

This gets around the minimum bet size per point and can in fact be applied to any market. We recommend that you still stick to markets in your recommended portfolio, but using this tactic will ensure that you can get on these markets when the stops are wider than normal.

If you do use this tactic on other markets I would recommend that you stick to markets with small spreads, such as Gold, S&P 500, Corn etc. I would not recommend using this on markets with wide stops such as Lumber or Orange Juice.

Q. I want to reduce my exposure by staking a very low amount per point - say starting £1 per point...

A: Be careful if presuming that the stake per point is what determines your exposure - it isn't. If RIO price is around say £30 a share, your £1 bet equates to holding £3000-worth of shares.

To gauge exposure (i.e., to work out what value of shareholding your spread bet equates to), multiply spread bet per point-stake(£) x share price (p) to give you the shareholding value (£).

Betting £5 per point on (say) a 250p share, is a smaller position than staking £1 per point on a 3000p share. (that £5 stake equates to a £1250 shareholding, the £1 bet equates to £3000).

Q. I only have £10,000 in savings and I don't want to risk it all...

A: Well, you could always use a bit of fixed income to spread the risk between holding all cash in a deposit account with lower than inflation interest and all equities with a much higher degree of risk. Alternatively you if you have a small pot of cash you could use say 20% of it to fund a spreadbet account with 5x leverage for short term trading only, put 80% into a fixed income bond and not buy any real shares at all. It's a very personal choice as each of us have different risk levels and needs. All the high street banks have Personal Bankers that give good advice (and try to sell you all their products) on the subject. They are worth a free session so long as you finish the interview with 'I need some time to take it all in'.

 ...Continues here - Calculating Exposure and Closing Positions

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