Should You Spread Bet with Guaranteed Stops?
Spread betting is a risky game of trading in which you can lose more than you have in your account. That’s because of leverage. Every time you buy or sell a market, you just need a small fraction of your total trade – a margin, which can be as low as 1-2%. If the market goes against you quickly, then you could be in trouble. That’s what most people think – but are they correct?
Spread betting has in fact some risks, and losing more than what you have in your account is a real possibility, but depending on your provider and on the type of trades you carry, it can be a really low one. Before going broke, there is a margin call trigger, in which most providers will automatically start closing positions you have in your account until the margin is again satisfied. This is a safeguard against having to put more funds into the account.
You can also set up stop loss orders to avoid any margin call and close your positions earlier. Some companies like Capital Spreads always attach a stop to each position you hold. But, sometimes it may not be sufficient. There are certain situations in which every trader is trying to buy or sell and the market will gap, causing slippage, meaning your position will not close at the predefined price. To avoid this, most providers (such as IG Index) offer you guaranteed stop orders which the closing price, but they come at a cost.
Many people, especially those new to spread betting, are worried about the possibility of not being stopped at the specified stop price and having to put additional funds into their accounts. Although this is an understandable concern, in reality this occurs much less than one may think, especially when you stick to reasonably liquid markets. Guaranteed stop orders are expensive so you should evaluate when and if you really need them.
Let me give you an example of the cost involved with guaranteed stops. Capital Spreads charges a 1 point spread in FTSE 100 daily rollover, but adds 2 more for guaranteeing your stop and requires that stop to be placed at least 30 points away of current market price. For FTSE 100 shares they charge 0.1% in the spread and 0.5% additionally for the guaranteed stop. This certainly is a cost worth considering carefully. Besides paying more, you also have to place the order far from market prices. In certain cases they may require a 5% or even 10% distance that may be completely outside what you want to allocate to the particular trade. In such cases, guaranteeing your exit is useless.
Nevertheless, there are certain situations in which you may be better off paying the price for the peace of mind. Examples are:
- When you’re spread betting small caps. These shares can easily experience price gaps because of illiquidity and because they are not well covered by analysts. The problem is that your provider also knows that so will charge you more on those shares than in others. The greater the risk, the more expensive the insurance.
- When you’re spread betting shares of companies approaching an important event such as an earnings release. Such events can trigger fast price changes if there is unexpected news.
- When you’re spread betting shares of companies involved in M&A talks or rumours. Within seconds the price can move very fast or if it happens outside market hours, when the market opens you not even have a chance to trade at the desired price.
- When markets are highly volatile. Protect yourself when the market is highly volatile. Remember that you are not a gambler, and the aim is to minimise risk where possible and cost effective.
- When spread betting some commodities. Commodities can often have large swings in price, even after periods of low volitility.
- To have a good night’s sleep. Sometimes you just need to have a good night’s sleep without thinking what will happen to your money. Buy the guaranteed stop if it will buy you piece of mind.
In normal situations use stop orders, monitor them, and stick to more liquid trades. This way you avoid headaches and unnecessary commissions. Good luck trading!