Spread betting: what is leverage?

Spread betting is a leveraged product, which means you don’t need to put up the full value of your position in order to deal.

Example: buying shares vs spread betting on share prices

With conventional share trading, if you want exposure to the potential benefits of owning $10,000 worth of Apple shares, you need to pay $10,000 up front. Simple, but expensive and somewhat inconvenient.

Now, if Apple is currently trading at $100.00 per share, spread betting $1 per point would give you the same exposure as owning 100 shares, ie $10,000 worth. In both cases, a one-point increase in price (to $100.01) would yield a $1 increase in the value of your position.

The difference is with a spread bet you would only need a fraction of $10,000 to open your position. This is dealing with leverage.

With IG, for example, opening a $1 per point spread bet on Apple (without any stop losses) may require an initial deposit of $500. This is calculated as: total position value x deposit factor (5% for Apple).

Risks of spread betting with leverage

Spread betting with leverage can be risky. Even though you only put up a fraction of the actual cost of a deal, you are still exposed to its full value. This means there is the potential to lose significantly more than your initial deposit.

In the above example, if Apple’s share price were to fall dramatically to $90.00 (down 1000 points) the associated loss of $1000 would be twice the size of your initial deposit.

It’s therefore important to think in terms of the full value of your position, rather than just the deposit you put down. Please see our dedicated leverage section for more information.

What is margin?

Spread betting on margin is another way of saying spread betting with leverage. ‘Margin’ is simply the amount of funds you need to open and maintain a spread bet. There are two types of margin to consider:

Initial margin – the minimum amount you need to put up to open a position
Maintenance margin – any additional funds required to keep a position open

Initial Margin

The initial margin is sometimes called the deposit margin, or just the deposit. As a general rule, the more volatile the market, the higher the initial margin required.

Maintenance margin

You also need to ensure that the equity in your account (the total money you have deposited, plus or minus any running profits or losses) is above the amount required for margin.

If the market moves against you – or our margin requirements increase – you may be required to provide additional funds so that you have enough equity in your account to fund the present value of your positions, including any running losses. This is known as maintenance margin, or variation margin.

If your equity level drops beneath the amount required for margin, then you may find that we close positions on your behalf, in order to reduce your margin requirement and prevent your account from going into a negative. To find out more about this process, take a look at our guide on margin calls.

Maintenance margin example

Say you ‘buy’ Spot Gold at £1 per point, with an initial margin of £800.

If Spot Gold then drops 100 points, you’ll lose £100 from your margin. Although the position is still open and you haven’t realised this loss, you may have dropped below the maintenance margin amount required for that position. If so, you will need to restore the amount in your account to keep the position open.

Margin requirements

Different spread bets will require different levels of margin, usually dependent on:

The market you are dealing in
The size of your position
Whether you have any stops in place

Guaranteed stop margin requirements

The margin required for bets with a guaranteed stop in place is equal to your risk.

For example, if you have a £2 per point ‘buy’ position on the DAX, with a guaranteed stop 50 points away. Your maximum potential loss is £100 (£2 x 50 points), plus a limited risk premium of 1.5 points (£2 x 1.5 = £3). Your risk is therefore £103, and this is also your margin. Unless you were to move your stop further away, you wouldn’t be margined any further, as the initial £103 would cover everything.

Non-guaranteed stop margin requirements

Bets with non-guaranteed stops are subject to slippage, which adds to the margin requirement.

In addition to ‘risk margin’ (ie the margin required for a bet with a guaranteed stop), you need to provide ‘slippage margin’, which is calculated as a percentage of the margin that the position would have needed if it didn’t have a stop at all.

Risk margin = bet size x stop distance
Slippage margin = slippage factor x no-stop deposit requirement
The slippage factor is a percentage, which varies depending on the market. For most forex bets it is 5% and for most shares it is 30%.

You can find out the slippage factor for your chosen market in our trading platform, by clicking on the ‘more’ button next to the market’s price and then selecting ‘get info’.

Calculating margin

Shares, forex and indices

When spread betting on shares or forex with IG, your margin is calculated as a percentage of the total value of your position.

Each market has its own set percentage. Shares deposit factors range from 5% for our most popular markets to more than 25% for very illiquid shares or unusually large bets. Tier 1 forex rates (those for the smallest positions) can be as low as 0.5% for major pairs, increasing to 7.5% for bitcoin crosses.

Calculating margin: commodities and other markets

Each market has its own ‘margin factor’, which is multiplied by the size of your bet to find the margin required.

We calculate our margin factors by looking at the volatility of the particular market and the amount demanded for equivalent contracts in the underlying market. Daily markets tend to have lower margin factors, as there’s likely to be less time for the market to move adversely.

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