A: Leverage is not what your spread betting provider allows you to use; it is what you decide to use and personally I haven't seen one spread betting or CFD trading account wiped out that wasn't geared too high. Most of the material you read about leverage is about the maximum leverage that brokers will allow and very little is written on the careful application of leverage in the trading sense. In other words, spread betting providers inform you about how much gearing they will allow, should you wish to, and not how much you should leverage, if you're sensible and know what you're doing.
Margin is the amount of funds that you need to deposit with a spread betting or CFD provider when borrowing from the provider to buy into an asset. Now, before your provider will 'lend' you money you have to put down a margin payment, which you will use to 'lever'. Your provider being a prudent dealer has calculated the risk beforehand and is prompt to tell you what the maximum is he will allow you to borrow from him. In foreign exchange trading this is typically 100:1, (but can also be 200:1, 400;1) while in indices this is typically 5% and stocks usually start at 10%. Of course the other side of the deal is how much of this accessible borrowing you are ready to use in your speculative trading. For instance, if you create an account with a spread betting provider, deposit £10,000 and open a stock position for a value of £10,000, you have not made use of any available borrowing.
In the above example the limit is leverage of 2:1 or seen from another viewpoint margin of 50%. You must have at least half the value of your total transaction available in margin (in other words collateral in case you aren't as hot a trader as you thought).
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A: From what I can see the biggest problem with this method of investing is people's lack of understanding. When the example of investing in BOI states that you can buy €10,000 of the stock with a €2,000 stake - people get a rush of blood and put on as much as they have (say €10,000 - which is the same as buying €50,000). If the stock drops by 10% they loose 5,000! Suddenly it's a crap system because you invested 10k and a 10% drop in the stock results in a loss of half your money!
In reality you should use it as a more efficient use of your 10k, and use it as such:
Whereas if you go the stockbroker method - the costs are way higher (transaction charges/government charges/possible CGT on profits) and your 10k is gone until you sell up! With spread betting you have a lot to play with!
I used to measure losses and gains in the markets in terms of white goods. 'Damn, I just blew a fridge.' 'Whoopee, I just made a flat screen.' It is a good technique for keeping you in touch with what's really going on on that spreadsheet. In these volatile times, it has been forced on me to think now of the sharemarket in terms of cars. One of my colleagues lost a Club Sport R8 HSV Holden Commodore on Tuesday. One of my clients lost a Jaguar XK Series. 'A new one?' I asked. 'Fully optioned,' he replied.
A: Here's a maths test. Which is greater:
0.25% on £5,000 or 1.5% on £1,000
Let me explain it with an analogy:
Imagine you and your friend walk into Curry's and you both see a shiny new HD 42" plasma TV that you both want to buy. You ask the salesman how much it costs and he types a few keystrokes on his computer and says to you, "For you it will be £500" then turns to your friend and says, "For you it will be "£100". You ask him why he is charging you more for the TV and he replies, "I am not. You are both paying exactly the same amount, 20% of what you have in your bank account". This wouldn't be fair would it? In other words, you expect to get the same quantity of goods and services for your money as anyone else, £500 is £500 irrespective of the proportion of wealth it represents.
Let me explain it with a Hypothetical:
Now, take 2 people (A&B) of equal aptitude who wish to start trading. They are both told that they should only risk 1% of their capital when they begin, i.e./ (Start small). So person A has saved up £5000 to put into his trading account whereas person B, who has saved for longer, has £50,000 to put into his trading account. They are both equally inexperienced. Would it be fair that Trader A only risks a max of £50/trade when Trader B risks £500/trade simply because he has more available to lose?
Now let me explain it with a real world example based on myself, no actors were used and no animals were harmed in this story.
Recently I saw a good opportunity to go long on a particular stock. I decided to do via my spread betting account. The stock was worth around £4.50 and I decide to bet £2/point. This gave me the equivalent of 200 shares and I had to put down a deposit factor of 10% of this value - 10% x (200 x £4.50) = £90. Now, I can easily afford £90 and I can easily afford to lose £90...but I don't have £9000 in my account, nowhere near that amount!! No, to me, £90 is £90 and as long as I could afford it, I took the trade. It was a successful trade that returned nearly 100% of my initial risk of £90.
Another example: Last year I saw a good opportunity to go long on the FTSE. I did it with a CFD. This was a £2/point CFD that required a £400 deposit. I deposited £800 into the account even though I would cut my losses at a specific STOP level, which varied, but wouldn't exceed my initial deposit. Again, this was a successful trade and I made 160% of my initial risk. If I followed the 1% rule on this trade it means I would have needed...£40,000 in my account!! Ridiculous!!
So what am I saying? The idea isn't to have so much money in your account that it allows you to trade with stops so wide they won't get hit as often because that is financial suicide! The idea is to improve your proficiency so that your trades show a profit almost from the time that you enter them. That is the one and only goal! Trades that get stopped by the market which then rebounds occur regularly. I can assure you, having the mindset that wider stops will prevent this from happening is financially disastrous.
I think Jesse Livermore summed it up perfectly with these two rules:
The highest profits are made in trades that show a profit right from the start.
No trading rules will deliver a profit 100 percent of the time.
I wanted to add one last thing that a very clever Engineer once said to me:
'An Engineer can do with 20p what any idiot can do with £1'
I suppose you can replace the word 'Engineer' with 'Trader' but I don't think an idiot would last very long in the markets.
A: The charts are in real time - it's only on the demo account where they are delayed.
Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)
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