Example one: betting on the UK 100
The FTSE 100 is currently trading at 7,500/7,501.
Spread bet prices are always quoted in pairs: the sell price (bid) and the buy price (offer). The difference between the two is known as the spread.
- The UK 100’s sell price is 7,500
- The buy price is 7,501
- The spread is 1 point
You think that the FTSE 100 is going to rise so you decide to buy the UK 100 at £5 per point. This is known as going long and means that for every point the index increases, you will make a profit of £5. If it falls, you will lose £5 per point.
This is a long position, so you buy the UK 100 at 7,501.
Your margin requirement
Spread betting is leveraged, which means don’t have to pay for the whole value of your trade upfront. Here, the UK 100’s margin requirement of 5% means you only need 5% of the position’s full value in your account to open it.
The total value of your position is (£5 per point x 7501) 37,505, giving you a margin requirement of £1,875.25.
You don’t need to calculate how much margin you need to open a trade manually, though. The City Index platform will do it automatically, as soon as you’ve entered a stake size into the deal ticket.
Remember, the higher the stake, the more money you need to deposit. You should always make sure that you have enough free equity in your account to sustain any losses and avoid being placed on margin call.
Leverage will magnify both your profits and your losses when spread betting. Because of this, having a risk management strategy in place is always a good idea.
At a minimum, it’s recommended to decide how much loss you can take from a trade – and how much profit you’re targeting – then use stops and take profits to automatically close your position at those levels.
For example, you might decide that our maximum loss here is £200, and that you want to target £500 profit to make that risk worthwhile. So you’d set a stop at 7,461, and a take profit at 7,601.
- The stop will close your trade if the FTSE falls 40 points to 7,461
- The take profit will close it if the FTSE rises 100 points to 7,601
Winning on a spread bet
Good news, the FTSE is up, just as you predicted. The index’s price is now 7,571/7,572. Your profit target from the trade was 7,601, but your worried about an impending bear market so you decide to take your profits early.
As you bought the UK 100 at the outset, you’ll need to sell it at 7,571 to close the position: earning you a 70-point return.
Your spread bet profit
70 points multiplied by £5 per point gives you a total tax-free profit of £350.*
As this is a daily funded trade, you will incur a small overnight financing charge if you hold your position open overnight. You can find more information about overnight financing charges here.
Notice how we bought at the higher price (offer) and sold at the lower price (bid)? This is how you pay for a spread bet – the spread. In this instance, your £5 per point and 1-point spread gives you a total cost of £5 to open and close the trade.
Learn more about the costs of spread betting.
Losing spread bet
What if the UK 100 had fallen instead?
Instead of rising, the index falls to 7,461/7,462, putting your spread bet into an open loss and triggering your stop loss.
The FTSE has fallen 40 points, which, when multiplied by your £5 stake, leaves you with a £200 loss.
As with the long position, you’ve paid £5 in the spread – and your loss would be larger if you kept the position for more than a single day, due to overnight financing.
Example two: shorting EUR/USD
Now let’s take a look at a short example on the world’s biggest forex pair: Eurodollar.
EUR/USD is trading at 1.1782/1.1783. You can buy it at 1.1783 or sell it at 1.1782 – and the spread is 0.8 points.
You decide to open a short trade by selling EUR/USD at 1.17822, betting £3 per point to make £3 for every pip that Eurodollar falls.
You’ll lose £3 each time the pair rises, however.
Margin in forex
Forex markets typically have lower margin requirements than other asset classes, which means you can access higher leverage. You’ll only need 3.33% of this position’s full value in your account to open it.
The trade is worth (£3 x 11,782) £35,346, giving us a margin requirement of £1,166.42.
You should ensure that you have more funds in your account, though, in case the position moves against you and eats into your margin.
Risk management when shorting
Stop losses are even more important when you’re going short. Why? Because there’s technically no limit on how high a market can rise, meaning there’s no cap on your losses – unless you use a stop.
For this opportunity, let’s set a stop 75 points away at 1.1857. Let’s also use a take-profit order at 1.1632, closing the position if it earns 150 points of profit.
With our £3 per point bet, that means our maximum loss is £225 and our profit target is £450.
Winning EUR/USD trade
You get a notification on your smartphone some hours later – EUR/USD has fallen to 1.1632, triggering your take-profit order. Your position has been closed out with a 150-point gain, which when multiplied by your £3 stake, leaves you with a £450 profit.
You didn’t keep this position open for longer than a day, so you won’t pay any overnight financing. The only cost to make this trade is the (£3 x 0.8) £2.40 spread.
Losing EUR/USD trade
Let’s suppose that EUR/USD had risen instead.
Some hours after placing your trade you check and see that the Wall Street has risen significantly. Thankfully you had your stop loss in place which cut your losses at 1.1857. This would result in a £450 loss on your position.
* Spread Betting and CFD Trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.