Risks of spread betting
As a new trader, it’s important to understand the risks associated with spread betting before you start trading with a live account.
Spread betting is a leveraged product
Leverage gives you exposure to the markets by depositing just a percentage of the full value of the trade you wish to place. While you could make a profit if the market moves in your favour, you could just as easily make significant losses if the trade moves against you and you don’t have adequate risk management in place.
For instance, if you place a trade worth £1,000 and the margin rate for the chosen instrument is 5%, you only need to pay a position margin of £50 to open the spread bet position. If, however, the price of the instrument moves against you by 10%, you lose £100 – double your initial stake in the spread bet. This is because your exposure to the market (or your risk) is the same as if you had purchased £1,000 worth of physical shares. In this way, your profit or loss in comparison to your initial outlay is magnified when spread betting in comparison to buying the equivalent physical shares. However, retail client accounts have negative balance protection, so your losses will be limited to the value of the funds in your account.
Risk of account close-out
Market volatility and rapid changes in price, which may arise outside of normal business hours if you are spread betting on international markets, can cause the balance of your account to change quickly. If you don't have sufficient funds in your account to cover these situations, there is a risk that your positions will be automatically closed by the platform if the balance of your account falls below the close-out level.
You should continuously monitor your account and deposit additional cleared funds, or close your positions (or a portion of your positions) so that the funds in your account cover your total margin requirement at all times.
The information icon located within the account bar at the top of our Next Generation spread betting platform will detail all your account information, including the close-out percentage level.
Account close-out example:
If the current close-out percentage level is 50% and you have four spread bets that each require £500 worth of position margin, your total position margin will be £2,000.
If your account revaluation amount then drops to less than 50% of the total margin requirement, in this case £1,000, some or all of the spread bets constituting this position may be closed out, potentially at a loss to you.
The account revaluation amount is the sum of your cash and any net unrealised profit or loss (as applicable), where net unrealised profit or loss is calculated using the level 1 mid-price.
Market volatility and gapping
Risk management is an important aspect of trading. As a trader, it’s important to remember that market volatility can sometimes cause prices to move from one level to another without actually passing through the level in between. Gapping (also known as slippage) usually occurs during periods of high volatility and can result in your stop-loss order being executed at a level worse than you had requested, exacerbating your losses if the market moves against you. Guaranteed stop-loss orders can protect your trades against gapping or when the markets are highly volatile.
At CMC Markets we offer a range of risk management tools, including guaranteed stop-loss orders, stop-loss orders and boundary orders. Find out more about our risk management orders.
Guide to spread betting holding costs
Depending on the positions you hold, and how long you hold them for, we may require you to pay holding costs. These holding costs are incurred on a daily basis when you keep positions on certain instruments overnight (past 5pm New York time). In some cases, particularly if you hold positions for a long time, the sum of these holding costs may exceed the amount of any profits made on the position or they could significantly increase losses.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.