Understanding Leverage in Financial Spread Betting

LONDON, December 30, 2011 /PRNewswire/ --

Financial spread betting is becoming an increasingly popular alternative to standard trading due to leverage which allows traders to deposit a little and trade a lot to achieve larger financial gains. However, losses can exceed the initial outlay, which is why understanding margins is such an important part of spread betting.

When trading stocks and shares, ordinarily you must pay the full value of the product you wish to speculate on. This can severely limit your potential gains if your trading capital does not match up to your strategy. This high level buy in also prevents many would-be traders from entering the market.

Spread betting providers like City Index allow traders to circumvent this using leveraged margin. This allows you to trade with only a percentage of your position's total value.

For example, if a trader buys £1,000 of shares in standard dealing, he or she has to pay the full £1,000 value to do so, which can have a great of financial risk involved.

In contrast, if you open a spread betting position worth £1,000, you would only have to pay between 5% and 15% of the share value (£50 to £150). This deposit, which is required for each open trade on your account, is known as the margin requirement.

Margin not only allows you to become a new trader by reducing the 'buy in' level, but also helps you to trade responsibly to prevent you from overstretching your financial means.

Some margins start from just 1%, which means that the potential for profits, or losses, from an initial capital outlay are significantly higher than traditional trading. However, should the market go against you, any losses incurred are equally high.

If the funds in your account run out, the trading platform will automatically close out your trades. However, it is common in trading to make a loss before the market moves in your favour to make a profit. For this reason it is a good idea to have sufficient funds in your account to sustain any losses in the short term, otherwise your trade could be closed out just before the markets soar, denying you the chance to fulfil the potential profits of your spread bets.

In summary, margin allows you to become a trader and start spread betting at a fraction of the usual buy in price. However, it is easy to get closed out before you can make a profit if there is a dip in the market. This is why understanding leverage and margin is so important in spread better. So ensure that there are enough funds in your account in order to keep trading.

To avoid enforced closure of your trades, follow a considered trading strategy and always employ appropriate risk management measures.

To learn more about spread betting, how to trade and risk management tools, visit City Index and download their free demo trading account and start spread betting with £2,500 in virtual cash and access to  thousands of markets, including indices, shares, currencies, commodities and more.

Spread betting is a leveraged product which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month in over 50 countries. We provide access to a wide range of instruments including margined foreign exchange, CFDs and, in the UK, spread betting. Visit http://www.cityindex.co.uk/ for more information.