Q. What is the difference between a deposit account and a credit account?
A: These are both accounts at spread betting firms that allow clients to start betting on the provider’s spreads. Deposit accounts usually come with a minimum deposit requirement of say, £50-£150. In addition, there are also minimum account balance rules which will only allow a spreadbet to be accepted by the provider if there are sufficient monies in the account to cover the initial margin requirements. In practice, most providers will allow you to open an account without depositing any monies upfront these days; although you will still need to fund the account before you can start betting.
Credit accounts are also sometimes made available, but require an comprehensive application process and fewer providers seem to offer them. Most spread betters normally fund their account with money, creating a deposit account but some opt for a credit account. A credit account provides you with a line of credit (base on a predetermined amount) without having to deposit any monies in advance. This is typically subject to providing proof of your assets and financial worth but credit accounts allow clients to cover their initial margin requirement (IMR) using no funds at all. This is particularly attractive if funds are tied up in a shares portfolio.
Q. Can I actually trade on credit and not deposit anything!?
A: Yes, a few providers will give you a line of credit and allow you to spreadbet without depositing anything… This will allow you to trade an account without the need to deposit funds prior to trading. Usually the provider will request proof of liquid funds in a multiple of the credit allocation you need (say 5 times). Proof of funds can be in the form of brokers valuation of a share portfolio, a bank/building society statement, PEP or ISA statement…etc. Once the provider is satisfied as to your financial standing, the provider may then establish your credit allocation (in which case they might also waive the need for you to maintain NTR). Beware though that this ‘credit line’ is simply a risk allocation figure against which you may trade and if exceeded entitles your spread betting provider to make margin calls. Should positions be closed and a deficit cash balance occur, your spread betting provider will still want you to make up for the deficit by depositing funds pretty quickly.
Beware that I think that most of the big losing shirt stories on spreadbets are from the companies offering credit to selected clients. The last thing any of the spread betting companies want is clients with large losses they can’t repay. No business wants to be chasing money through the courts. To this end some spread betting companies have stopped credit altogether and others have put in deposit protection software. Most providers now have their Customer Account Management Systems setup to automatically close out positions to prevent negative deposit situations. You still gets margin call warnings so as to give you chance to close out under your own management but at least you don’t run losses below your initial deposit – at least that’s the theory. Don’t know about other companies but with deposit protection software and/or guaranteed stops there is little excuse for anyone to lose their shirt. Also, some providers like for instance Trade Nation now provide a no-negative balance protection guarantee meaning that you never risk an amount greater than your account balance.
Not many spread providers offer credit betting today – the credit crunch in 2008 resulted in some providers that offered this facility to suffer some exorbitant losses as clients were unable to meet margin calls in the market crash which ensued. In the aftermath City Index for instance discontinued credit betting – Spreadex and IG Index are two providers that still offer credit betting but I’m not really earnest about trading on credit at all so I would advice against the practice.
Note: In practice a deposit account (where you deposit funds in advance) is easier to open as normally you will not be expected to provide proof of funds before opening the account.
Q. Do spreadbetting firms actually update your credit file with your account history?
A: I do know that City Index (and those brokers that use them) carry out an Equifax full credit search when you apply for an account, and even when you re-activate a dormant account (that’s what happened to me). In any case not many providers offer credit these days and many will close out your bets if you run out of monies deposited with them. So their wouldn’t be a need to report anything.
