A: Initial margin (NTR is explained in more detail here) is the funds required to be in your account in order to open a position. Each market we trade has a different initial margin which is a representation of the volatility of that market. For example, the initial margin requirement of FTSE September is 150 times your stake. Therefore to place a £2 trade on this market you would need to have £300 in your account.
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...
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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.
A: Paying spread to a spread bet provider is just a different form of commission that you would have to pay to a stock or futures broker, it may cost more or less, but these must be compared on that front like-for-like for a fair comparison.
Spread betting may not be an efficient mechanism for holding some longer term positions. This can be down to the cost of leverage on non Future based bets. Stating that longer term trading ‘will pile the odds against you’, I would argue against. It may be true that the additional costs associated with the cost of maintaining leverage over an extended period of time are greater, but that is because your exposure to the market can/will be greater because of the leverage. If you bought £1000 worth of stock with a spread betting provider and £1000 worth of stock with a stock broker and held this for a couple of years, then it will undoubtedly cost more with the spread betting company, but if you used the £1000 as a deposit to leverage up (using 10% margin) then you would gain access to £10,000 worth of exposure. Therefore by trading with a spread betting provider you can either gain exposure to £1000 worth of stock for a £100 deposit, leaving you to do as you wish with the other £900, or you use the full £1000 to leverage up by 10 times to £10,000 worth of exposure and multiply your gains/losses. The ability that this has comes at the additional cost you are talking about. Ultimately though the overall total cost may be greater, but the net gain (if you gain) is greater also because you are simply paying a percentage of a greater amount of exposure that was speculated because of the leverage.
Not all spread bet products are based on Futures, the Rolling bets are based on the cash products not on Futures, e.g. the Rolling Vodafone bet. I personally do not consider these spread bet products to be subject to zero sum game characteristics.
Spread betting on futures based products may well be zero-sum-game as the derivatives markets are considered so. If this was a seriously negative connotation then there would be hardly any liquidity of trade flow on them. Consequently I would say the rising volumes of the previous years on derivative exchanges would prove this to the contrary. It should be noted that the derivatives markets are used for two primary reasons, speculation and hedging. The hedging mechanism is used to hedge underlying markets that are not zero-sum-gain, whereas the speculators are speculating against other speculators and the hedgers. Therefore although they are technically zero sum game products they are derivatives of products that are not.
Spread betting on futures is ultimately based on providing a mechanism for retail investors to speculate on moving prices in financial markets. I don’t think anyone in the derivatives or spread bet industry would profess that their product is suitable for everyone, but it does provide a mechanism for the retail investor to participate in a tax free manner. Ultimately spread betting providers are just a vessel for clients to speculate on financial instrument price movements. They don’t necessarily argue that speculating on these markets is suitable for everyone, simply that if you are the right sort of person then they offer a product that has some significant benefits.
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.
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.
A: They will issue margin calls, but not liquidate you if you have negative 'equity'.
To avoid being liquidated, your net funds, i.e. cash balance (not margin) must not go below 20% of the margin used.
So for example on BP (plucked out of thin air, randomly...), if share price is (almost was...) 500p and you took out a £1,000 pp position long, that is an underlying position of 100,000 shares, i.e. £500,000. At a 3% margin rate, that would require £15,000 of margin.
So, if your free margin went below 0, you would get a margin call - i.e. if you had less than £15,000 cash balance (Cash $15,000, margin used £15,000 = free margin of zero) .
When (if, you understand, if...) the cash balance went below 20% of £15,000, i.e. £3,000 (i.e. BP went down by 12p, which would cost you £12,000) the position would get liquidated.
As for closing they do have the right to close but we seem to get away with small temporary positions in the red... It all depends on how volatile market is - reading their terms and conditions they do not have to inform you, they can close it at any time. Sometimes you might get away with 2 days; sometimes they close it to protect their interests. IG gives me a ring and says I have 2 days to pay it up.
A: Spread betting brokers make the most of their money from the spread; for instance as I’m writing the spread around the underlying bid and offer of Vodafone is a total of 20 basis points (0.2 of 1 percent). The spread means that at any given time, the price that you can buy at is always higher than the price you can sell at. This also means that the provider makes a profit from the spread whether you win or lose.
Your spread bet does not affect the share price of vodafone as it is a contract between yourself and the spread betting provider. So, if you go long by 10 pounds a penny the provider is effectively short 10 pounds. Bear in mind that there may be thousands of trades in vodafone throughout the day so the provider's overall position may be constantly changing. Depending on the nature and overall size of the provider's 'book' they may also hedge their exposure independently - which could take the form of buying or selling shares on an exchange.
Also note that for a stock like vodafone there is plenty of liquidity but for others there may be very little so a provider may potentially offer a limited size in which to trade. Many illiquid stocks (in the open market) have a number of market makers that offer prices, but again, only in a certain size (normal market size - NMS). The normal rule of thumb would be that the provider is able to offer the equivalent as a spread bet so that that they can cover that bet fully (and not over-expose themselves).
Of course they will also make money on the interest generated on unencumbered funds and financing charges…
A: Financing is the cost of borrowing or lending that is attributable to a position you may hold. A futures price like June FTSE already contains financing (or the cost of carry) in its price - hence you would typically see a futures price trading above the cash price. A rolling product however, is financed on a daily basis – if you are long you pay financing / if you are short you receive financing.
So if you buy the equivalent of £10,000 of Vodafone Rolling bet you may only need to deposit £1,000 but you will be charged funding on the full £10,000 on a daily basis. Capital Spreads charge 2 above and below libor. If libor is 5% the annual charge would be 7.25% which equates to £1.98 per day. The argument is that the £9,000 that you did not have to deposit can sit on an interest bearing account to mitigate a large part of the financing cost. Bear in mind also that you can also go short (effectively lending the equivalent of £10,000 of Vodafone). For that you would actually receive financing of 5% - 2%.
A: On spread betting if you use the rolling daily cash bet you will be charged the financing rate each day you are long. If you use the quarterlies those costs are already incorporated into the price. The rolling daily cash bets have a tighter spread than the quarterlies.
For instance for Capital Spreads the overnight financing for a rolling position can be calculated using this formula:
F = [ (Price / U) x Stake x I] / Bwhere I = applicable interest rate and B= day basis (365)
Interest rate on long bets: RFR + 2%
Interest rate on short bets: RFR - 2%
If you had been long £1 on GBP/USD Rolling Daily last night this is an example of the charge incurred:-0.55
You would have been debited £0.55.
If you had been short £1 on GBP/USD Rolling Daily last night this is an example of the charge incurred:Sell 1 of X GBP/USD Rolling Daily
(1 * 2.0156 * -3 / 36500 / 0.00010000) * 1-1.66
Although you are normally credited the rolling charge when you are short, as this has returned a negative number you would have been debited £1.66.
A: The cost of carry is what is referred to as Fair Value. This is made up of the interest and dividends payable before the end of a futures contract [futures price is spot price plus interest less dividends (as dividends aren't credited to you with a spread bet) then finally adjusted for spread].
Financing is different from cost of carry. The overnight financing rate is the spread betting provider’s charge for holding a position overnight. This is based on base interest rates in the countries with which the market you are trading on is associated then +/- 2% (for Capital Spreads) depending on whether you are long or short. If the result of the formula above is positive then any long positions would be debited and short positions credited. If the result of the formula is negative then the opposite will occur.
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