Margin Requirements

Using Margin Facilities in your Account

When spread betting, instead of funding the entire cost of a position totally by yourself; you just need to provide your broker with a deposit, which is used as the ‘margin’ for your bet. Possessing a margin means that a small amount of money can ‘control’ a much larger amount of shares than if you were to buy or sell them directly via a traditional stock broker.

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However, although this situation appears to be idyllic, it does in fact harbor extensive risks. This is because trading on margin can easily encourage you to become greedy and start over-trading. You must strive to stem such emotions and problems by always utilizing a well-tested money management policy.

You also need to be fully aware that spread betting brokers often trade the financial markets as well. They do this to generate larger spreads so that the price of assets will have to move greater distances before traders can profit from their positions. Essentially, these companies manipulate the size of the spreads they offer in order to restrict the amounts that they will have to payout.

Implications of Leverage

After you have opened an account with a spread betting broker, you will then gain access a leverage facility of 100:1 or even higher. Consequently, you will be able to open very large positions with just a small deposit. However, you will need to adopt caution because such facilities can invoke extensive levels of risks should price begin to move against your open positions.

You must accurately determine your loss potential for each of the trades you execute in order to combat such problems. If you fail to do so, then you could be in danger of over-trading which will expose your equity to excessive risks. As such, the amount you risk per trade should always be just a pre-selected percentage of your total equity. In particular, you are recommended to restrict your risk exposure to just 2% or less per trade. If you are a novice, this risk strategy will provide you with maximum survival chances by safeguarding your account equity.

The Power of Compound Interest and Leverage

Albert Einstein was once asked what he considered to be the most powerful force in the universe and he answered that it was compound interest!  This concept is one of the main benefits of spread betting that attracts so many traders. This form of investment offers you a great prospect to utilize compound interest in order to expand your equity very quickly. For no other reason, you should learn the methodologies and strategies about spread betting in order to exploit this valuable feature.

This is because spread betting presents you with the ability to compound your funds daily.  By constantly plugging your profits back into your account balance, you can attain a substantial growth within a comparatively short time period. Traders even have a term for this, which is bet compounding.  As many professional developers of trading models consider this to be a very powerful strategy, all novices should consider this concept in the same light.

How Compound Interest and Leverage can Work in your Favour

Imagine that you began your spread betting career using a deposit of $10,000. You may be surprised to know that even if you selected a profit target of just 2% per trading day your equity would have grown to about one million dollars within one year.  You can use a compound interest calculator such as this one to learn more about how it works.

This sounds theatrically great but is it possible in realit?  The answer is yes, especially if you appreciate that spread betting not only enables you to take advantage of the power of compounding but it also allows you access to the power of leveraging. For example, imagine that you are utilizing leverage of 50:1.  This means that your initial deposit of $10,000 would permit you to trade assets as large as $500,000. Consequently, if you were to secure just a few wins a day, then you would readily exceed your daily target of 2% of your total equity, i.e. $200.

However, although such targets are possible you must adopt extreme caution when using leverage because excessive use can lead to overtrading and expose your account balance to serious losses. You need to develop a well-tested methodology that will prevent you suffering such a fate by showing you how to always provide optimum protection for your account balance.

Controlling your Emotions

One of the main causes of greed is that you will be provided with a significant leverage facility by your spread betting broker. You will then be able to activate positions of considerable worth with just a small deposit. This is great as long as you know what you are doing. Unfortunately, many novices do not and have a tendency to adopt a gung-ho approach by throwing caution to the wind and targeting one gigantic payout. Instead, you must always place the protection of your own equity as your number one priority.

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