Spread Betting, Margin Calls & Other Horrors

My spread betting experiment failure

This is a guest post from Richard who blogs about personal finance at www.RichardPF.co.uk. Richard chose to provide us with a personal story reminiscent of My CFD Experiment Failure. It too should act as a warning to others of the perils of getting involved in financial products that you don't fully understand.

Recently, I found myself with plenty of time on my hands and little money coming in (or what others like to call unemployment). I was thinking of ways that I could make a little extra money whilst not working. However, I needed something a bit more fast paced, sexy and racy; what I needed was spread betting. As it turned out, I needed spread betting like a hole in the head.

Playing at Spread Betting

I set up a free account with one of the many spread betting Companies and downloaded the free software to be able to practice spread betting without losing any money.

The Java software was a bit slow and clunky on my (somewhat antiquated) PC. I soon got the hang of how to bid, go short (hoping the price will go down) and go long (hoping the price will go up).

I graduated tot he full spread betting account and funded my account with £500 which I thought would be enough to have a little 'play'. What you must realise about spread betting is that it's highly leveraged, you can bet £10 per point, with only £10 in your spread account.

Margin Call

When the market moves against you, a very polite broker phones to tell you that there's a margin call. A margin call means that you need to refund your account, i.e. transfer more money into your account as your balance has dropped to below zero.

I followed a few companies that I thought would be ideal as their price would often move up and down on the latest company announcements and I thought I had a good handle at 'guessing' these small daily movements as the latest company figures or deal was announced.

It's also worth noting that your 'winnings' are tax free as the government regard it as betting rather than investing. This should have been telling in itself, as indeed I found out, to my peril!

Going Short!

I was following the share price of a 'Tech' Company. The news suggested that the Company was having a tough time of it and just as I thought, investor sentiment started to drive the share price down.

Acting quickly, I thought I would jump in on this movement and 'go short', expecting to see a nice, healthy return from a few hours 'work'.

Tracking the share price on the exchange I could see the price falling and I was set make some good money, but looking at the spread betting software the share price was moving upwards, not downwards. This didn't seem right. Why was this? Was my clunky old computer that slow?

I scanned the spread betting pages and realised that I was 'off exchange'.

I hadn't really thought about that statement, just some new financial mumbo jumbo to get used to, now that I was a 'day trader'. The spread betting share price either climbed or stayed where it was throughout the day, whilst the actual share price continued to fall. I soon realised what 'off exchange' meant.

Off Exchange

'Off Exchange' meant that the spread betting Company did not have to follow the market at all and if they wanted to squeeze all the day traders and hold the 'off exchange' market price or even go up when the actual share goes down when they can.

The Computer algorithms would work out which way to move the share price to maximise the revenue for spread betting Company and whilst I was thinking all this the friendly broker rang again, " Margin Call", £3,000 needed to refund the account. This was an expensive introduction to spread betting and I quickly learned not to bet again!

Have you tried spread betting yourself?

You can read about Richard's review of the terms and conditions spread betting companies use, which are well worth a read before you open an account at www.richardpf.co.uk/post-19/city-index-spread-betting.

Interested in guest posting or writing a sponsored post? Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment.