Spread betting may be risky, but it has several benefits over traditional share dealing if you want to play short-term trades. It's tax-free - my personal favourite reason - but it also enables you to take large positions in a given market without actually putting down a lot of money upfront.
Of course, it's this ability to trade 'on margin' which also means that spread betting can wipe out your money far more easily and rapidly than with ordinary share dealing. And it also means you can lose far more than your deposit. So always bear this in mind when you're making bets. You must be willing and able to monitor and control your positions a lot more tightly than you might be used to with standard share dealing.
So how does margin trading work anyway? When you take out a bet with a spread betting provider, you have to pay a deposit. This is the margin. Its size depends partly on what you're trading and on who your provider is. To bet on an individual share for example, you might have to put down from as little as 3% right up to 20% of the total value of your bet in your trading account, depending on the stock you're trading and how volatile it is.
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For example, imagine that you want to place a bet on Marks & Spencer. You go 'long' i.e. you buy - at £10 a point (one point = 1p) with the shares trading at 400p - 401.5p. Say the margin requirement is 10%. Your total exposure is the same as if you owned £4,015 of M&S shares (401.5 * £10). So your deposit, or margin, will amount to 10% of this, which is £401.50.
Effectively, you're putting down a chunk of the money you'd need to buy the stock, and borrowing the rest from the spread betting firm.
The margin is there, basically, to protect the spread betting company. It means it can feel comfortable with your exposure in other words, it can be pretty sure that it's going to get back any money you end up owing it if your bet goes against you.
If your losses get so big that they threaten to go above the margin you've made available, you'll get a 'margin call'. In other words, the spread betting company will demand that you increase the size of your margin (basically, you'll have to top up the funds in your account). And if you can't do that, the firm will close out your position. Hopefully, you'll monitor your trades closely enough to avoid this happening. We'll discuss how you can protect yourself from racking up hefty losses if a bet goes badly wrong in another piece.
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