What is margin and leverage?
When you trade using a Spread Betting account, you trade on leverage, which allows you to gain a larger market exposure than may otherwise be possible with more traditional forms of investing. Trading on leverage can enhance your profits, but equally can increase your risk so make sure you understand how much you are risking with each position and use a risk management strategy that protects you against rapid market movement.
Margin is the amount of money or deposit you are required to have in your account in order to open a position. Because you are trading on leverage and your positions are magnified, you will need to have sufficient funds in your account in order to protect you against market movements. The amount you will be required to deposit is expressed as a percentage of your total position size. For more volatile markets, the margin level will almost always be higher.
Spread betting leverage explained
Spread betting is a leveraged product. This means that you only need to deposit a small fraction of the overall value of any trade, known as margin.
For example, if the margin requirement for a trade is 20% then you would need 20% of the full value of the trade in your account to open the position.
If you buy 1,000 shares in ABC plc and its share price is 500p, your total investment is £5,000. The equivalent spread bet would be £10 per point on the same company.
In this example you are required to deposit £1,000 to open the equivalent of a £5,000 investment. This is how trading on margin leverages your position, freeing up additional funds to use on other products.
Benefits and risks of leverage
Trading on leverage means that you benefit from much larger market exposure from your initial capital outlay, increasing your potential profits. But, this also means that you are exposed to more risk if the trade goes against you and your losses will also be magnified.
How leverage can magnify profits
In the example below you can see how trading on leverage has helped magnify profits compared to a similar investment using more traditional forms on share trading. Your Spread Bet in ABC plc is successful and you decide to close out your trade with a £100 profit. The return on your spread bet deposit is 10%, whereas the return on your share trade is 2%.
How leverage can magnify losses
Remember, trading on leverages magnifies your losses as well as your profits and it is important that you understand the downsides of greater market exposure. The example below is based on the same trade as the profit example above, though in this example the market has moved against you and your losses are magnified.Your trade in ABC plc is unsuccessful and you decide to close out your trade with a £100 loss. The return on your spread bet deposit is -10%, whereas the return on your share trade is -2%.
What is margin requirement?
Margin requirements refer to the amount of capital you will need in your account to cover your position. Margin requirements are expressed as a percentage of the total value of your position. Please note margin requirements vary across markets. Generally speaking, the higher the margin factor the riskier the market. Please see the relevant Market Information sheet on the trading platform for full details.
What is a margin call?
A margin call is a warning that the capital in your account has dropped below the required minimum amount needed to keep your position open. You should always ensure you have sufficient funds in your account to cover any losses for the period that you decide to maintain your trade.
If you don't, you could quickly find yourself on a margin call which puts you at risk of having your position automatically closed out.
The Margin Level Indicator on the City Index platform represents the level of cover you have associated with your open positions. It is located in the upper left corner of the trading platform. It displays one of the three scenarios listed below:
If your margin level indicator is greater than 200%, this will show as > 200%. This means that you have sufficient funds require to keep your positions open
Your trade is at risk
If your margin level falls below 200%, the margin level will display a percentage between 80% and 200%. You are at risk of being placed on margin call
Should your margin level fall below 50%, you no longer have enough funds in your account to cover your total margin. Consequently closure of your open positions may be triggered. A warning symbol will be displayed next to the margin level if it drops below 80%