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Spread betting provides the opportunity to trade in both rising and falling markets. But like all forms of dealing, you need to be aware of the risks and costs involved.
Spread betting is more risky than traditional forms of financial dealing. This is because it's a leveraged product.
Leverage allows you to open positions with just a small deposit relative to the size of your exposure in the underlying market. While this amplifies the potential to profit, it also exposes you to the possibility of losses that can exceed your initial deposit.
Indeed, should the market move against you, it is possible to make significant losses in a very short period of time.
For example, if you use leverage to open a position worth £1,000, you may only have to put down 10% of the total position. Despite only paying £100, your exposure is £1,000 and you are leveraged 10:1.
When you buy £1000 worth of shares in the traditional way, the most you can lose is £1000 – i.e. if the share price falls to zero. When spread betting, however, your potential losses also depend on your deal size.
If you bet £10 per point, for instance, you stand to lose ten times as much for any given change in price as if you bet £1 per point.
When 'buying' a market (going long) your maximum loss, while potentially very high, is limited by the size of the underlying market. The underlying prices cannot fall below zero. If you bet £10 per point on a market worth 100 points, your maximum loss is £1000.
However, when 'selling' (going short, or shorting) there is no limit to what you can lose, as the underlying price could, in theory, keep rising indefinitely.
In practice, spread betting providers like IG have systems in place which may close out positions automatically should you have insufficient funds to cover running losses. However, if the underlying market moves or 'gaps' suddenly, or if there is a lack of liquidity, this isn't always possible. It is essential therefore that you take steps to manage your risk.
For any given market, your spread betting provider will quote you a two-way price.
The bid will always be below the underlying market price, and the offer always above. The difference between the two is known as the spread, which is effectively the 'price' you pay for placing a deal.
For example, if the underlying market price is 510 pence, we might quote a four-point spread of 508/512. If you sell, you’ll sell at the lower price of 508. This means that the underlying market would have to drop four points from 510 to 506 before you can start making a profit.
When you open a position, you’ll also be liable for certain costs associated with holding your position open for a period of time. These are financing costs, and they reflect the cost of borrowing or lending the underlying asset.
When you open a quarterly bet, we factor the cost of running that bet to expiry into the quoted spread. A futures bet like the June FTSE already contains financing (also known as the cost of carry) in its price. This is why futures spreads are typically different from the cash price.
A daily funded bet, however, is priced according to the current cash price of the underlying instrument. This means that for each day your position remains open, you’ll accrue additional financing costs.
We give you the option to choose a base currency for your account. This means that profits or losses for any foreign currency bets will be converted back into the base currency before they appear on your account, including any charges such as interest or dividends.This may incur a currency conversion fee – our standard charge is 0.3%
We may also need to pass on the costs of dealing with third parties. For example, charges for credit card payments or telegraphic transfers.
In addition, subscribing to the ProRealTime charting package costs £30 a month, although this will be refunded every month you place four or more deals. We reserve the right to charge you for the service if your qualifying trades are of an extremely low value. And if you haven't placed a deal for two years or more, we will charge you a monthly inactivity fee of £12.
As well as paying charges, to keep a spread bet open you will need to maintain a margin.
Different providers have different spread betting offerings; here's how to get started with IG
Find out more more about the basic principles of spread betting
See the components of a spread bet: the spread, bet size and bet duration