What happens if a company I have a spread bet on goes out of business? Let’s suppose I have a market exposure of £10,000 at 10% margin and I only put down £1000 to open the position. What is the company went out of business? Would the spread betting company phone me demanding £9000 (since the overall exposure was £10,000) or would I only lose the margin amount? And what’s if I took a guaranteed stop at a particular level – would the guaranteed stop act as a protection if the company goes bust?
In general, if you don’t have a guaranteed stop loss in place, you are on the hook for £9000. With a guaranteed stop the provider will be on the hook for the £9000 (but keep in mind that some provider won’t offer guaranteed stops on small caps). This is very much like having a stock price dropping from $1 to $0.01 all the while you are holding your long trade. The daily market to market will reflect the drop in equity by a drop in value.
But trades are synthetic – the provider being my counterparty – why would the provider profit from £9000 because a company has gone bust and is now worth zero. I don’t think this is fair…
Sorry, but that’s reality… with the same logic if a provider had a client who was short and the company went bust the provider wouldn’t have to pay him as it isn’t ‘fair’. That’s the point of guaranteed stops – otherwise why would people use them if they knew providers would be lenient!? Also, in reality most spread betting and CFD providers hedge a majority of their equity exposure so if the stock price fell sharply overnight, then the provider would also have lost (no such thing as a free lunch).
Here you are dealing with technicalities and legality on the fine print. As for stock suspensions there are in itself a number of circumstances in which this can happen;
voluntary winding up
However do keep in mind that a company does not go out-of-business overnight and this is normally long reflected in its stock price. Let’s take the case of a company that is delisted by its own free will; this will normally close at the last price traded. However this is very much unlikely, what normally happens is that shares are suspended due to serious issues and then we are left waiting until the accountants are called in.
What happens if you have a short position and the company goes in liquidation and the stock is suspended at say 10p?
Companies that go bust are normally closed at zero…unless there is something exceptional about the whole affair. If a stock is suspended a spread betting provider will usually reserve the right to closed traded at the last traded price after say, 4 days of suspension…but providers very rarely take this option (I believe Capital Spreads used it just about twice in the last ten years). But frankly this doesn’t happen much… most companies go down to 1p or lower before going out of business.
CPP shares suspended.
…it is likely that any agreed outcome will have a significant adverse financial impact on the Group, but until such outcome is determined the Group cannot predict the scale or consequences of that impact. Given the uncertainty as to such outcome, CPP is currently unable to assess accurately its financial position and inform the market accordingly, and as such considers an immediate suspension to be appropriate. The Group expects that the suspension will remain in force until such time as CPP is able to determine with sufficient clarity the financial impact of such actions as are required by the FSA to be taken, which may not be known for some time…
So what happens to spread bets, are they suspended as well?
Without checking rules per each bookie – I think existing positions are merely frozen for now. If a spreadbet expires before shares resume trading, I think the bet gets closed at valuation that existed ahead of suspension (?). If shares resume trading before bet has expired, I think they continue at whatever is then the market price, until closed or till expiry. I guess some bookies perhaps have rules allowing them to void bets rather than honour them – but we don’t deal with spread betting providers of that type do we :-0 (and will certainly name names here if they dare do so)
EDIT: Most spread betting firms do have clauses that allow them to vary terms – almost whenever it suits them. One trick they might resort to is upping the required deposit percentage to a level that forces the client out if the account cannot cover it. Not the kind of tactic I would expect the more reputable (and reputation-conscious) firms to employ.
EDIT: With IG Index, see Clause 29