Margin Requirements

Now that’s how you place and close a bet once you have your account set up online. But you have to realize that your spread betting company doesn’t want to lose money by you betting more than you can afford. You can lose more than you bet, but the bookmaker wants to make as sure as he can you don’t lose more than you have in your account, because otherwise he would have to come after you for the difference.

One way he helps himself and you is by putting in an automatic stop order or stop loss order, as noted above, and this gives some limitation on how much you can lose, as you’ll see in the next chapter. But he also protects himself by requiring a certain amount in your account before you can place a bet, the “margin” that we talked about in Chapter 1. How this is calculated can vary from dealer to dealer.

It is your responsibility to make sure you have enough funds in your account. Just because your dealer takes your bet does not free you from paying for any mistakes you make. But usually the systems work, and you will know if you are getting close to a problem. Most companies will send you an e-mail, called a “margin call”, if you don’t have enough funds in your account for the current performance of your trades. The e-mail will ask for you to deposit more funds within a certain short time, and if you don’t then the dealer can start closing your positions to free up more funds.

It’s important you respond, because the dealer has no liability to close the positions in any particular order. At this stage, all he wants to do is protect his business. The fact that you’re in this position means that something has gone wrong, and you’re not keeping an eye on your trading as much as you should. When push comes to shove, which it has in this case, you still want to keep control and be the one deciding which trades to close rather than leaving it to your spread betting provider.

Each spread betting provider is different, and you must make sure that you know their terms for responding to a margin call. By law you have to meet a margin call within five days, but if the spread betting company has different terms, such as meeting it within three days or responding immediately, then that is what counts.

Don’t forget, there is another way to deal with a margin call, rather than just sending more funds to your account. If you can’t or don’t want to do that, you can simply cash in enough positions so that your account now has enough money for the bets you have open.

Having given you that warning, and bearing in mind it depends on your dealer, let’s look at some typical margin amounts. For betting on shares of large freely traded companies, the dealer may need about 10% of your exposure. What does that mean? Say a share is trading at 515 (that’s actually £5.15) and you place a £10 bet on it. That’s £10 per point, so if the share lost all its value, you would lose 515 x £10 which is £5150. That’s how much you could lose going long on this share. It’s the same as buying one thousand shares, which would cost you that much, and letting them go to zero.

Now with a large company, it’s not likely that the shares will go to zero. So your bookmaker doesn’t need all that money for you to place your bet. In fact, he may be satisfied with 10%, as noted above. That means that with £515 in your account, you can place a bet which will pay out the same as if you had bought 1000 shares, which would have cost you ten times as much. This is an example of gearing or leveraging your money.

If the share rises 50 points, then you have made £500 at £10 per point, and your spread betting account will be credited that much. That nearly doubles the amount that you had in the trade, the great advantage of trading on margin. But obviously if instead the stock goes down 50 points while you still hold the bet, you lose £500. Then, or probably when it is on the way down, is when you can expect a “margin call” telling you to put more money in your account. After all, you would now hold a bet which would require £465 (allowing for the reduced value) in your account for you to make it, and if there were no other funds in your account you would be down to only £15! Hardly enough to cover the bookmaker against any further drop.

So this example shows why you should never trade up to the limit that is allowed you by your spread betting provider. There is no sure thing in trading, and you don’t want to be facing a margin call for a bad bet. Later on in the guide you will learn about “position sizing” and money management, which should prevent you getting into this situation. It may seem that the bets that you are recommended to make are smaller than you could, but you cannot tell when you will have a bad bet or two which will set you back.

If you spread bet on the shares of smaller companies, then you must expect that a larger margin is required. It can go up to 50% or more, but it is purely to protect the spread betting firm from you making bets that go bad – after all, they don’t know how good you are, they just give you the facilities to trade. After the bad markets in the global crisis, many spread betting companies were caught out despite exercising this amount of caution. As the Daily Telegraph reported in March 2009 –:

Michael Spencer forced to inject £70m as City Index clients default

“Michael Spencer, the Conservative party treasurer, has been forced to inject £70m of his personal fortune into City Index after traders defaulted on tens of millions of pounds worth of trades.

Accounts filed at Companies House late last week reveal that clients of the spread betting business were unable to cover £43m of losses after share prices collapsed.

Cash call: Michael Spencer has had to inject £70m of his own fortune after City traders defaulted on transactions.

Just six clients accounted for the majority of the loss, with one client losing £29m betting on a single Spanish property company.

Notes to the accounts reveal that another City Index client has lost a further £12m speculating on the markets, since the year end. To date £4m of that debt has been recovered.”

As you can see from the amounts involved, these losers were not like you and me, they were experienced and in it for the big time – yet they still lost. Now that was an exceptional time, and many traders and investors alike lost on the markets, but it just goes to show how you must take care to not get in over your head.

Trading on margin is the general term for what you’re doing, whether you’re spread betting, trading futures or any other thing.  You will sometimes see the amount you need in your account referred to as the Notional Trading Requirement (NTR), and it means the same thing – it’s just the funds you need to cover any potential losses. It would still be calculated for example as 10% of your maximum loss on a trade.

There is one other method that some spread betting companies use, but it works on the same principle. This is called a “bet size factor” and it varies according to the volatility of what you’re betting on. You will find a list of bet size factors on the website of the betting company, and you’ll see that the factors are different for different products. It’s easy to use. For example, if the bet size factor is 500 and you’re betting £1 per point, then you’ll need £500 in your account – you just multiply the numbers together.

Mostly, you won’t have to figure these things out for yourself. If you bet online as many people do, the website will automatically calculate the margin you require and make sure it’s in your account before accepting the bet. Just one point – if you open more than one bet at a time, you have to have the NTR for each separate bet in your account, you can’t combine them.

Don’t ignore the margin call if your bet comes into profit after you receive it. At least call the company and find out if you need to respond. Once the margin call has been issued they will be looking for the funds to arrive, and may not refer back to your account to see if it has come back into profit.