At first sight, spread betting can appear to be incredibly complex. When making your first trade it’s not uncommon to feel a lack of control; with this guide, you’ll understand how to make a spread bet and how to use a stop loss to minimise your risk.
Deciding on a Market
As a new trader, you may have a share price in mind or you might not know where to start. If you know what you’re looking for, simply navigate to the market or make a quick search. If you don’t, here’s a quick guide to great markets for new traders:
New Trader Markets
Different markets have different spread sizes. A smaller spread size means less risk to you; the smallest spreads can often be found on the FTSE 100 and the US S&P 500. You may also find tight spreads in the foreign exchange markets, particularly the GBP/EUR pair.
Not sure why the spread is important? The spread explained »
Buying or Selling?
Now that you’ve found the market that you want to trade in, you have to consider either buying or selling. If you expect the market to go up, you would buy (also known as ‘going long’); if and when the value increases, you can then sell for a profit. If you expect the market to go down, you would sell (also known as ‘going short’); it’s a strange concept of selling what you don’t have, but by selling – you are committing yourself to buying back in the future and what you hope to be a lower price. The buy price is also known as the bid price and the sell price as the offer price – these are one and the same.
Using a Stop Loss
Once we’ve decided on the market, and our predictions have led us to either by or sell – we need to consider a stop loss. Spread betting can result in losses that go beyond your initial deposit, and therefore it is really important – especially for new traders – that a stop loss is used.
When making a trade, you will be prompted to add a stop loss; if you’re not, be sure to check in any advanced settings for this option. A stop loss will automatically close your trade if the price increases or decreases to a certain amount. We’ll go into more detail below.
Making the Trade
For this example, we are going to use the platform provided by ETX Capital.
- You decide to bet on the FTSE 100 which is trading at 5677/5678, you’re convinced that the index is going to increase and you opt to buy.
- The price you buy the FTSE at will be at the bid price, which is 5678.
- You then need to decide on what price to trade at – it’s your first trade so going in at the minimum of £1 per point makes a lot of sense!
- So you’re set up and ready to buy the FTSE 100; but you need to be able to cover the margin requirement. The margin requirement = £ per point x deposit factor; most brokers will calculate this for you. If the margin requirement isn’t already calculated, then you will need to take a look at your broker’s website for the deposit factor on this market. In this case, the margin requirement is 1% i.e. you would need a positive balance of £56.78 to trade. Applying a stop loss limit can reduce the margin requirement. This is the case for ETX Capital but other brokers may differ.
- Your balance allows you to make the trade and you decide to leave your position unchanged for a couple of days. Over that period, the FTSE 100 increases to 5696/5697. You decide to close your position and in doing so, sell back the FTSE 100 at the offer price (sell price) of 5696. This leads to a total point gain of 5696 – 5678 = 18 x £1 per point = £18 profit.