Questions about Margin Requirements..

Q. I still don't get initial margin requirement - what is it?

A: 'Dealing on margin', 'margin trading' or 'gearing' are all terms associated with spread betting and CFDs. When a spreadbet is opened you are only required to pay a fraction of the full value of the deal up front, and in effect you borrow the rest from the provider.

Initial margin, sometimes referred to as 'deposit margin' (NTR is explained in more detail here) denotes the funds required to be in your account in order to open a position. Each market has a different initial margin which is a representation of the volatility of that market. For example, the initial margin requirement of FTSE September could be 150 times your stake. Therefore to place a £2 trade on this market you would need to have £300 in your account.

Q. How much is a comfortable 'margin' for spread betting?

I had £3,400 in my account and was down £410 when I got a margin call. I know your views on margin calls, and I've closed my account in disgust. However, I will go back to it, but I don't want to be in that position again. I need enough in there to allow a modest drop, in the knowledge that my position will turn in a day or two. I know there's a formula, but what's your philosophy on it? Heaven only knows how much you must have in yours.

A: I think the main point here is not playing with money that cannot afford to lose. Often a margin call can be a 'wake up call' that money is being stretched. Spread firms allow people to have an awful lot of credit and I think investors should ensure they know how much exposure they have. So I know if I have a tenner bet on a 500p share that's £5,000 exposure. Now I ask myself if I can afford to lose the £5,000...

Q. I do understand the advantage of leverage trading but could one pay in full for the shares bought within a spread betting account?

A: Effectively yes. For example if you bet £100 per point, that is the same exposure as owning 10,000 shares.

If you go for £100 pp PRTY at an entry price of 30p the equivalent full value is £3,000 (10,000 x .30) and therefore if you have £3,000 or more in your deposit - and no other position - you are ungeared. Generally having your gearing exceed 3 times your deposit is not a good idea.

Q. 'When you place your spread bet you must have enough in there to cover your loss' - Correct or Wrong?

Will I be able to choose how much I want to spread bet and also the date which the contract will end? Also, what do you mean in layman's terms by 'know your market'?

A: You need to have more in your account than just the amount to cover your stop loss. Your IMR (initial margin requirement) would depend on the market you were betting on. It's less for individual stocks than indices and you would need to check with your spreadbetting company.

When I said, 'know your market' I mean watch how your share moves, its typical trading ranges, if it jumps or progressively rises/falls. Every share is different in how it reacts in the market. For example, it's no use setting a 10 point stop loss when a share range is regularly 50 points. Your stop loss would be triggered and you would lose.

You can choose how much you want to bet per point (some companies let you trade from as little as 50p per point) as long as you have the required margin to accommodate the bet. Remember you can lose more than your original deposit if the market goes against you which is why spreadbetting is not suitable for everyone and you should familiarise yourself with the terms and conditions of the company you choose to bet with carefully.

If you set a stop loss on a December contract and it triggers before the date the contract expires e.g. October, then your trade will close out and you will lose. If the market 'gaps' e.g. your stock misses your chosen stop loss, it can carry on falling and you can lose more than intended unless you put a "guaranteed" stop on which costs you.

You cannot just choose a date when you want a contract to end. There are set Future dates e.g. Sep, Dec, Mar etc. which tend to close the third Tuesday in the chosen month but it may vary so always check. You can though, close your bet at any time within the contract date if you want to take the profits.

It all sounds very complicated but it really isn't once you get used to it.

Q. Will a spread betting position save me on interest charges if I were to open the same position by borrowing the money from a bank?

Would appreciate help here because I never spreadbet before. This is what I have concluded, please tell me if I'm correct?

If I had 1m shares worth 1 pound bought and paid for and I also had a 1m pound loan at base rate +1%, by selling the shares and taking a long spreadbet in the same company. I would effectively be paying base rate +2.5% on the share, but would have the advantage of being able to get interest on the 90% no longer tied up at say base rate -1%, so instead of paying 6.75% a year I would effectively be paying 8.25% a year but recouping 4.75%, so my cost of investment would go down from 6.75% to 3.5%.

The money I would recoup is the money that I do not have tied up in the shares because I only have to deposit 10% for the spreadbet (assuming money market is paying around 4.75 at the present time)

A: Either you borrow money off the bank to buy the shares at say libor + % or you borrow money off the spreadbet company at libor + %.

I don't think you can borrow off the bank at base rate +1% or borrow off the spreadbet company at base rate +2.5% either - it'll cost you more but that's just detail.

If you use spreadbet you will borrow £100k from your bank and £900k from the spreadbet company.

However, whichever way you look at it you still borrow £1m and have to pay interest on that.

P.S. - if there was some magic way to reduce your financing in the way you suggest someone would have gone bust years ago. You simply can't get something for nothing when it comes to money. If any opportunity does exist anywhere in the financial markets it soon gets arbitraged away.

...Continues here - How do financial spread betting companies make money?

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