By paying margin, you’re paying a relatively small deposit for the full value of your bet. Your provider then essentially lends you the rest of the money. So if you ever hear someone talk about spread betting ‘on margin’, it’s just another way of saying spread betting with leverage.
There are two types of margin you need to be aware of.
1. Initial margin
Initial margin is the amount of money you need to open each individual bet in the first place. You’ll also hear this referred to as your initial deposit.
Initial margin is the deposit you use to open a bet
Different spread bets will require differing levels of initial margin. This depends on:
- The size of your position – As you’d expect, smaller bets require a smaller margin amount, while larger bets require more margin
- The market you are dealing in – Often the more popular it is, the lower the margin will be
- Whether you have any safeguards in place – If you’ve limited your risk, by using stop-losses for example, your margin will usually be reduced
Calculating initial margin
Typically, initial margin is calculated as:
The margin requirement is entirely up to your provider, and also depends on the market you’re betting on. Many providers will offer as little as 0.5% margin for major currency pairs, and up to 25% or more among less popular shares and indices.
Say you want to buy 1000 shares of Company ABC, currently at a price of 475p a share.
If you traded these shares traditionally, it would cost you £4750 (1000 x £4.75). If, however, you placed a spread bet on the equivalent of £4750 worth of shares, you might only be required to pay a margin of as little as 5% of this value, which would be £237.50 (£4750 x a margin requirement of 5%).
If the share price then rose to 500p your profit would be £250 in both cases. With margin, however, you’ve only had to put down £237.50 instead of the full £4750.
2. Maintenance margin
Because your initial margin only represents a small portion of the full value of your bet, if the market moves against you, it might not be enough to cover your losses.
Maintenance margin is the extra amount you pay to cover any losses your bet incurs
Maintenance margin – also known as variation margin – is the extra amount you need to pay should this happen. It will increase as your losses increase, so you need to ensure there’s enough money in your account to cover maintenance margin at all times.
In the event that there’s not enough money in your account in this instance, your provider will get in touch with you directly to request that you add funds. This is known as a margin call, and if you fail to act on it, you could find your bet is closed altogether.
Calculating maintenance margin
Say you want to go long on Company XYZ. It has a buy price of 220p, and you choose to bet £80 per point.
Your bet has a total value of £17,600 (£80 x 220), and your provider asks for a margin of 5%.
This means your initial margin works out at £880 (5% of £17,600). As you have £4000 in your account, you have enough funds to open this position.
Company XYZ’s price then drops 50 points to 170p. This reduces the overall value of your position to £13,600 (£80 x 170).
Although this reduces your initial margin to £680 (5% of £13,600), you now have a running loss of 50 points. This means you now owe maintenance margin of £4000 (£80 x 50 points) bringing your total margin requirement to £4680. This example is illustrated in the table below.
|Share price = 220p||Share price = 170p|
|Bet size||£80 per point||£80 per point|
|Total value of bet
(Bet size x share price)
(Total value of bet x 5%)
(Bet size x points lost)
(Initial + maintenance)
But because you hadn’t allowed for this added expense in your account balance, you’re £680 short of the full amount. When this happens, you can expect to receive a margin call. If you don’t add more money promptly, your provider may scale back or even close your position entirely.
So you need to make sure you keep an eye on your running losses, and ensure you always have enough money in your account to cope with them.
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