What is Leverage?

By mosesbet · Filed Under Spread Betting Comments Off on What is Leverage? 

What does Leverage mean in Spread Betting?

One of the main advantages of spread betting is leverage, but what leverage mean?

Leverage means that you are able to take positions far in excess of your initial stake.  Because you are trading and betting on the direction of the market (usually for a maximum duration of a day), you receive greater profits from small points movements on the FTSE.  This is advantageous because it means not only can you make more profit from a few points upswing, but you also need less capital reserves to do so than under regular financial trading. 

Leverage vs. Conventional Shares Trading:

For example, let’s say that I wager £50 per point on the stock of Barclays PLC and it moves up from 150 pts to 155 pts.  This gives me a profit of £250. 

Under conventional trading however, if I bought £50 worth of shares and the share price moved up 5 points, then I’d only make 5p profit (1% profit on my investment).

It doesn’t matter whether you are a multi-billionaire hedge fund manager with lots of assets, or a sole trader with a capital reserve of £100, the risks and leverage are still the same. The downside with spread betting is that the risks are equally large.  You can just as easily lose a large amount of cash as you can win gambling on movements on the FTSE 10.  This is why it’s so important to keep a constant eye on the degree you are leveraged.

Always make sure that you are no over-exposed or in a financial liable situation.  Usually spread betting companies will prevent this from happening anyway, since they require you to hold enough balance for a 10% drop in the price of your shares.  Financial companies and organisations will always try to make you aware of the risks involved from spread betting.  Leverage is a double-edged sword, and it is always important to protect yourself from over gearing.

Allowed Leverage vs Common Sense Leverage

There is a difference between the amount of leverage a financial platform will allow and what you leverage as part of common sense.  Spread betting accounts and CFD (contract for difference) accounts can be completely wiped out even without being geared too high. 

When you are borrowing money from a trading platform like the City Index or TradeFair, the maximum that they will lend you will be depending on the amount of funds you have deposited, also known as the “margin”. This ranges from 100:1 for FOREX markets, while stocks usually start at 10%.  In other words, if you have a £100 deposit, you can borrow up to £1,000 in the FTSE 100 or DOW markets.

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