The nature of spread betting means that you are not required to cover the full cost of each spread bet up front but instead your required just to have the necessary amount of funds in your account to cover any potential – this commonly known as the Notional Trading Requirement (NTR). It is in this way that your able to achieve significant leveraging through the use of spread bets.
The Notional Trading requirement is calculated in two different ways:
- As 10% of the value of the potential loss that could be made on a trade.
- As a multiple of a pre-determined value known as the bet size factor.
In this example the required margin for a long bet on Big Bank PLC is 10. The order amount stands at 1 and the price at 100, so the notional trading requirement is 10 as the maximum potential loss that an individual could make on this trade would be 100.
While your bet is open the bet will enter into either what is known as an open profit or loss position. This is the calculated profit or loss made from a particular bet depending on the movements in the market. While your bet remains in an open profit position, you have no need to worry about margin calls. But this is not the case when you are in an open loss position, the total amount of funds that have to be available from your account increase. If you do not have the required amount of funds in your account what will result is known as a margin call. The spread betting company will contact you.
In order to keep the trade open with the hope that your position will return to a point where you are back in open profit, extra funds will need to be transferred into the account. How the company will treat you and how quickly decisions need to be made on your bet will often depend on how well the company knows you and your history with them. In an ideal world one whats to avoid being forced to close a position by the company.
Warning: Spread betting risks substantial financial loss, all transactions are at your own risk. Only speculate on financial spread bets within the limits you can afford. Spread betting may not be a suitable investment for all. Make sure that you understand the risks involved and seek independent advice to whether spread betting is suitable for you.
Part of The Beginners Guide To Spread Betting