What are the risks?
Unlike most traditional financial dealing services, spread betting is a leveraged product. This means that your initial deposit payment gives you exposure to a comparatively larger portion of an underlying market than if you bought the instrument directly (via a stockbroker, for example).
This means that spread betting can result in losses that exceed your initial deposit. And without good risk management, it becomes possible to make significant losses over a short period of time. It is therefore important to understand risk and learn how to manage your portfolio effectively.
How do I manage risk?
Understand your market
Before dealing, it is important to understand the market on which you are taking a position. Knowing the potential for each market to experience volatility and establishing the likelihood of sharp price movements is essential when considering the risk associated with each bet. For example, historically some markets are less likely to make sudden discontinuous jumps, while others, such as shares (which can be subject to profit warnings and the like), may be more likely to make abrupt movements.
- Monitor your open positions
An equally important risk management strategy is simply to closely monitor your open positions. This is particularly relevant if you have not attached a stop-loss. Volatile markets can move hundreds of points in minutes, and while a good understanding of your market may help pre-empt extreme fluctuations, there is no substitute for actively monitoring your account.
- Use stop and limit orders
There will inevitably be times when it is impossible to keep an eye on your open positions. This is why we offer a range of order types to help you manage risk without capping your potential for profit.