One of the most attractive features of financial spread betting is the leveraged returns it provides, with each point in movement equivalent to a multiple of the original stake. While this is in many respects its greatest upside, the negative weight of leverage in spread betting requires special attention, and traders should act decisively in managing risks and offsetting the negative features spread betting can deliver. Of course it’s important not to go overboard and be too cautious in trading capital, but remaining mindful of the risks of scaling your positions is important in order to avoid running into difficulties.

How Leverage Takes Shape

Leverage is the ability to generate artificially high returns from a lower exposure of capital, allowing for disproportionately high earnings to be realised. Generally, this tends to be financed through rolling loan agreements with brokers in margined trading styles, although operates slightly differently in the present case. In spread betting, leverage is realised by multiplying the capital staked by the degree of movement in the position – thus, leveraged is inherent in the structure of the spread betting transaction. In this sense, gains quickly rack up into substantial percentage returns.

On the flip side, this extreme leverage effect is felt equally as strongly on the underside of the market, and where markets move against a position the ferocity of accrued losses should be a cause for proactive, preventative concern. This means the imperative on traders taking steps to prevent risks and managing their capital is urgent, and it’s wise to be continually mindful of the dangers leverage poses.

Guarding The Downside

The dangers of leverage aren’t some bogeyman that you’ll never encounter – they are live threats to the safety and integrity of your capital, and it’s essential to take measures to protect against their impact. While spread betting transactions carry unlimited liability (i.e. traders can lose an unlimited amount of money on a position), there are ways in which this effect can be chilled slightly to deliver more security and cushioning.

The first practical tool at the trader’s disposal, and the one used most frequently in protecting against downside exposure, is the stop loss. Stop losses are orders that automatically sell a position when its value falls to a predefined point (or the reverse, for stop limits on the upside of short trades). While stop losses usually incur an extra cost, their impact in framing the total liability of a trade should not be underestimated, providing effective coverage of the negative side of the chart.

When spread betting trades are going well, it can be easy to forget that leverage isn’t just a license to print money. In fact, it is a highly complex, highly dangerous trading tool that should be met with caution and prudence where possible to protect the integrity of trading capital and allow sensible profiting from managed risks. Only traders who think defensively in structuring their portfolio can grow towards sustainable, long-term success.