One of the most attractive things about spread betting is also the most dangerous: the leverage.
Financial spread betting is a margined product, which means that only a percentage of the total value of your spread bet - the margin - is required as a deposit in your spread betting account in order to have a position open. This allows you to leverage your spread betting profit (and loss) potential by increasing your exposure to an underlying asset with the same initial investment.
For example, a deposit of £100 might allow you to open a spread bet position equivalent to a £1,000 equity investment. This leverage is great news if the market moves in the direction you expect, but it obviously carries a high degree of risk if the market moves against you.
It is for this reason that you should keep stop losses at the cornerstone of your spread betting risk management. Simply read on to learn about the two different types of stop loss order and how they help to keep your spread betting losses to a minimum.
The Standard Stop Loss
A stop loss is an order to close a spread betting position when the market reaches a predetermined level set by you, the spread bettor. The potential loss on a position is limited by requesting that the spread bet is closed once the price has fallen to an agreed level. Once a stop loss order is triggered your spread bet will be closed at the next available price.
Stop Loss Example
If you were to open a spread bet of £1 per point on the UK 100 at 5000 and were only willing to lose £200 on the trade, you would set up a stop loss order at 4800.
This means that if the market price went against you and fell to 4800, the trading platform would automatically close your spread betting position at the next available price to prevent you from incurring any further losses.
That said, if you are particularly concerned about your financial spread betting risk, especially if you are unable to keep a check on a volatile market, guaranteed stop losses are more advisable.
The Guaranteed Stop Loss
A guaranteed stop loss offers an additional level of certainty when managing your downside spread betting risk.
With a guaranteed stop loss you pay a small additional premium on the trade to guarantee that the level at which your order will be executed is the exact level that you set, regardless of any market gapping.
For example, imagine you have bought £2 per point of the Wall Street Index at 10100, and have highlighted 9950 as your maximum loss level - a £300 loss allowance (10100-9950 x £2). You can use a guaranteed stop loss order to ensure that, should the Wall Street Index reach 9950, the trading platform will automatically close out your trade at that exact point.
Unfortunately some bad company earnings pushed the Wall Street Index lower to 9900, but your trading platform closed your position out at 9950. Even though the Index continued to trade past your maximum risk allowance, the guaranteed stop loss has already stopped your losses by automatically closing out your trade.
Stop Loss
Ultimately, whether you opt for standard stop losses or pay the additional premium to apply guaranteed stop losses, the most important thing is that you always use one or the other to limit the downside risk of your financial spread bets.
Spread betting carries a high level of risk to your capital with the possibility of losing more than your initial investment and may not be suitable for all investors. Ensure you fully understand the risks involved and seek independent advice if necessary.
Guaranteed Stop Loss / Stop Loss Comparison
Which spread betting companies offer a Stop Loss and/or a Guaranteed Stop Loss.
Stop Losses Available?
Guaranteed Stop Available?
Stop orders may also be available from other companies. Notes.
Note - Spread Betting carries a high level of risk to your capital and you can lose more than your initial investment, it may not be suitable for all investors. Ensure you only speculate with money that you can afford to lose and that you fully understand the risks involved and seek independent financial advice where necessary.
'Spread Betting and Stop Losses', Feature by D. Jones, last update: 15-May-12
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Risk Warning:
Spread Betting carries a high level of risk
to your capital and you can lose more than your initial investment,
it may not be suitable for all investors. Ensure you only
speculate with money that you can afford to lose and that you fully
understand the risks involved and seek independent financial advice where necessary.
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