The margin on spread bet and CFD accounts are about to increase significantly. Why?
Many (and indeed any accountants we’ve spoken to) consider spread betting in the same light as a sports betting app.
They couldn’t be more different. Financial spread bets and CFDs demand a different level of consideration to sports betting. The difference between a CFD (contract for difference) and spread betting – apart from a grown-up name – is in detail.
Beginners ought to start with CFDs as losses are deductible and then move to spread betting once profitable as profits on spread bet accounts are not taxed. Most do it the other way round.
In both the trade is an agreement rather than a purchase of a security. They are traded as a derivative of the market. That is why they can be traded both long and short either as a stand-alone trade or as a hedge.
This sports app miss conception possibly fuels the increase across the board of margins in CFDs and spread bet trades.
Not too long ago margins were calculated at 0.5% of the potential risk, it is mostly now 1% of the risk and soon to increase to 5% of the risk.
If we take the currency pairing of Sterling versus the Dollar the market as we write is at 13,962. To spread bet this at say £10 per pip (a pip, in this case, is the final digit). The risk is 13,962 x £10 = £139,620
Probably not the same as a sports app bet! The margin required to trade at 5% is £6,981. If we consider that a suitable maximum margin of our account at any one time is not more than 10%, then we would require £69,810 to trade. Many serious retail traders trade up to four times this amount.
So, yes the margin increase ought to make many traders reconsider.