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You Are Here: Home > Stockmarket & Trading > Spread Betting Section > Tutorials : Margin
Spread Betting Margin

What is it - How does it work

Page Summary :

What is Margin when dealing in Spread Bets, how does it work, and what are the advantages and disadvantages. This page looks into the concept in more detail.

If you were to buy £1,000 of shares through a traditional stockbroker you would have to put up the full £1,000.

But spread bets offer leverage so if you do a similar deal you might only have to put up around 10% of the value, and this 10% is known as deposit margin.

However, there is another margin at work with all financial products that offer leverage and that's called variation margin.

This page looks into both types in more detail.
Deposit Margin
Some call it initial margin, others the deposit factor or the Notional Trading Requirement (NTR). Whatever the case it's the cash deposit needed to open a position.

Deposit margin is there to ensure you have enough cash in your account to cover any potential losses that might occur if the market moves against you.

Deposit margin can vary from 5% to 25% of the underlying value of the deal. 5% will be for liquid and non-volatile instruments and towards 25% for the illiquid or more volatile stock. The levels can change, for example if stock prices are being hammered as they were in the first 3 months of 2009, expect initial margins to rise across the board to take into account the sharp rise in volatility.

For example, you might be trading Vodafone shares today and are asked to put up a 5% margin, but next week if the markets go ballistic this might be raised to 10%.

To find out how much margin is for a particular product either look on your broker's website, check your online trading platform or call the broker's help desk.

An example - The FTSE 100
At the time of writing the FTSE 100 has a deposit factor of 200. This means -
  • Take a position, long or short, at £2 a point you'll need a minimum of £400 as deposit margin
  • And if the deposit factor was 300 then the initial deposit would obviously be £600

Deposit money is withdrawn from your account but of course is fully refunded when the position is closed.

Deposit margin therefore is a concept of risk control. It's a way to make sure that spread bet clients only trade within their financial means. If a client therefore has £2,000 in his account he won't be allowed to trade it as if it had £4,000.

Maintenance Margin

Some refer to this as mark-to-market margin or variation margin.

Spread betting as you know is different from buying shares in the stockmarket. If you buy 1,000 shares of XYZ Industries for £1 a share and hold them for several months before selling out at £2 the profit will obviously be £1,000. But this is the point - you can't get your hands on the profit until the shares are sold.

Margined products work differently because all profits and losses are credited and debited from an account in real-time and this is called maintenance margin. For example -

  • You go long £2 of the FTSE at 4230
  • If the market moves higher you will see your account being credited £2 for every point
  • And for every point it moves lower £2 will be debited from your account
  • Again, all of this happens in real-time as the market moves both up and down in favour and against your trade

Theoretically if you open a trade today (buy £2 of the FTSE at 4230) and the market closes 100 points higher your account will have £200 credited to it via positive maintenance margin.

But the following day the FTSE falls 100 points and you dump your position at 4230, the same price you bought it, and so £200 will be debited from your account via negative maintenance margin.

So although the trade neither made nor lost money it still looked as if you earned a £200 profit one day before losing £200 the next.

Maintenance margin is again used to make sure your have enough money to fund a present position at all times. And if you don't you'll be either ordered to deposit more cash or your broker can forcibly take control of the position and will dump it whether at a profit or loss, usually though at a loss.

Summary

Margin is there for a reason, to make sure clients trade sensibly, responsibly, and within their financial means.

Both types, deposit and variation margin are simple to understand but you must realise that margin is very black and white - if you have the cash you can play, if not you can't.

WARNING! - Spread Bet Broker Advice



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