In spread betting, you do not have to pay the full cost of the bet upfront.
However, you do need to have efficient funds in your account to cover any potential losses – usually called he Notional Trading Requirement (NTR) – although terms may vary.
The NTR is calculated in two way:
- 10% of the actual value of your maximum potential loss on a trade
- As a multiple of a pre-determined value called the ‘bet size factor’, again, the term may vary.
What you need to know:
Every trade you make will require a separate Notional Trading Requirement or initial margin available in your account.
For example, if you want to place two bets and each requires an NTR of £1,000 then you would to have £2,000 available in your account before your spread betting company accepts both bets.
The bet size factor, it may be called something else but the principle is the same, varies according to the volatility of the underlying product. There are various definitions for volatility. In this instance, it is defined as the statistical measure of how much the price of a certain share or asset will move at a certain time or over a certain period of time.
The more volatile a share or an index is, the bigger the bet size factor.
When trading online, you do not have to calculate the NTR for each trade as this is done for you.
While your bet is open, you will incur what is called an open profit or loss position. This is you calculated profit or loss on the bet depending on whether the market is moving in your favour or not. To state the obvious, it only becomes a realised profit or loss when you close the trade.
When you are in an open profit position, you don’t have to worry about margin calls. But when you have an open position, the total funds that have to be available from your account will increase.
If you do not have enough funds in your account then this will result in a ‘margin call’. That is, your spread betting services provider will contact you to top up your account.
What you need to know about margin calls
Your spread betting company calls you and requests that you put an additional £100 into your account to cover your open loss. By law, you must meet the margin call within five days. However, the policy differs between spread betting companies. Some companies expect you to meet the margin call immediately. They will try and reach you by email or in some circumstances by phone. Check the terms and conditions of a spread betting company as it will include an explanation on how to deal with margin calls and how soon you need to pay by.
Margin calls don’t have to be paid. You can reduce your position to stay within your National Trading Requirement.
What everyone wants to avoid is closing out positions forcibly. The treatment of margin calls will depend on how well your spread betting company knows you, your relationship with them and the type of trade you are executing.
What happens if the price moves back into your favour?
You can either choose for the extra funds to be returned to you or the money stays in your account. Some spread betting services pay you interest on money sitting in your account.
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