Spreadbet, the risks

The important thing for the beginner to understand with a SB is (their) risk.

A SB is a geared product so the risk is different (greater) to, for example, an equity (share) trade which is not geared.

With an SB your cash requirement is the cost of the bet and collateral.

The first thing you may notice is that SBs are effected on a cost per point basis.

The cost per point will vary according to what the underlying is (FX, shares, indices etc.)

If we look at UK equities then the basis is £ per point. The point in this case would be 1p (or 1p price movement).

For example let’s say we want to do a SB equivalent to buying 1000 shares with a price of £1 per share.

The equivalent SB would be £10 per point:

1. Buy 1000 shares at £1 cost £1000

2. Bet £10 a point

Example 1, if share price goes up 1p profit would be 1000 x 1p=£10

Example 2. ditto profit would be £10 x 1= £10

This all seems ok but let’s say the share price drops 10% to 90p. The loss on the SB would be £100 (quite a lot for a £10 bet).

Of course you do not have to close a SB but you may find your SB provider will need a lot more collateral to carry the position.

In short you need to know your potential loss in advance or what your exposure is.

At £ a point you just need to add two noughts to establish the number of shares you are effectively buying.

Thus £10 a point would be 1000 shares, the value of which would be that figure multiplied by the prevailing share price.

If we take two examples:

1. £10 a point on Royal Dutch Shell

2 £10 a point on Lloyds Bank

You can calculate that the exposure is much different:

Royal Dutch are around £17 so £10 a point would be £17000

Lloyds Bank are around 74p so £10 a point would be £740

Quite a difference.

For similar risk stocks (both these are FTSE100) then possibly your exposure should be roughly equal so your bets should be more like £1 a point Royal Dutch and £20 a point for Lloyds.