Beginners Guide to Spread Betting

New to Spread Betting?

The Spread Betting Trading Centre has compiled the following guide
to explain how Spread Betting works

What is a Stop Loss?

As you can see, losses can accrue very quickly in Spread Betting. One way of reducing the risk of losing too much money is to opt for a stop loss limit.

This is where the trader agrees a limit beforehand which is the maximum amount of money he is prepared to lose. If the markets go against him and he starts to lose money, the stop loss will automatically stop the bet when the agreed loss limit is reached.

Let’s look at an example of this:

Stop Loss Example:

A Spread betting firm offers a spread of 125-126 at £10/point on shares in Company X. The trader decides to short because he thinks the price will drop. He is aware that the price could rise as well and so asks for a stop loss to be placed if the price reaches 130.

The potential loss is calculated as the difference between the opening sell price and the agreed stop loss level, multiplied by the rate offered by the spread betting company. In this example it is 5 points x £10.

This means that the most the trader can lose is £50.

However, where the stop loss option falters is that is does not protect against a sudden jump in share price of Company X from, for example, 125 to 135. There is not time enough to put the stop loss on, because there is no steady progression past the 130 mark as the market has moved too quickly.

In this case it is possible to ask for a guaranteed stop loss to protect your money, although these often involve more risk-taking as they are offered on a larger spread. The idea behind a guaranteed stop loss is that a spread betting company charges a premium to the trader for guaranteeing to put the stop in place. If any losses are made by a sudden jump in the market, the spread betting company is liable for these.