Spreads & margins explained

Understand the importance of spreads and margins

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Guide to spreads

Here’s a quick guide to the things you need to know about spreads:

• The buy price is always higher than the sell price

• The spread will vary from market to market, and can sometimes change depending on market volatility. The wider the spread, the more the market will need to move before you can make a profit

• You can always see both the buy price and the sell price in any quote, so it’s easy to understand the spread for any trade

• CMC offers tight spreads (from 0.7 points) on popular instruments such as the UK100, US30, EUR/USD and many more. You can find out more about these great prices here

• The tighter the spread, the quicker you can make profits (or losses)

• Spreads can change depending on the market, volatility and liquidity. CMC Markets has some of the most consistent spreads around and we publish our historical spreads within the charting tools so you can see how good they are, no matter what the market is doing.

Guide to margin

With spread betting, you don’t buy or sell the actual product, you’re just betting on the price movement. For each bet you only need to put up a small amount (the initial margin) of the total bet value in order to open that bet.

Here’s a quick guide to the things you need to know about margin:

• The margin rate varies depending on the product you bet on. Margin rates typically range between 1% and 20%

• Trading on margin gives you more profit (and loss) potential because the initial margin is less than the full value of the trade

• Because markets affect your account in real time, the margin amount has to be maintained throughout the lifetime of the bet

• If your bet loses money you may need to top up your margin to keep your bet open

• In the markets section of our site you can see the margin level for each product.

Doing the sums

Here’s how we calculate the initial margin amount:
Initial Margin = Opening Bet Value x Margin Rate

The Opening Bet Value is calculated as:
Opening Bet Value = Opening Bet Price x Stake x Point Multiplier

Here’s a more detailed example using a buy bet on the UK100

You decide to buy €10 per point on the UK100 at a price of €6000.00. The margin requirement for Indices in general is 1% financing level is 99%, meaning you only have to put forward 1% of the total size of the position as initial margin.to take out this trade:

Total Exposure = Price x stake size
Total Exposure = 6000.00 x €10
Total Exposure = €60,000

Initial Margin = Total Exposure x Margin Rate
Initial Margin = €60,000 x 1%
Initial Margin = €600

Therefore, for a €600 deposit, you will control a €60,000 position. Your profit or loss will be relative to the total position size and is not limited to the €600 initial margin.

You have effectively borrowed €59,400 to transact this trade, therefore you will incur a daily borrowing cost on this amount if you hold the position open after 17:00pm New York time.

Isn’t leverage and margin risky?

Trading on margin can be risky if not used wisely as you are controlling a large position with a small initial outlay. Your overall profit and loss is based on the total position size so if the markets move quickly in the opposite direction to your trade you can potentially lose more than your initial outlay. It is important not to over leverage yourself and only trade with a level of risk you are happy with. At CMC Markets we offer a number of tools to help you manage and reduce this risk.

System features to manage your risk

These three platform features help you manage the risk involved in spread betting:

1. If your account value falls below 50% of your total margin requirement, the platform will attempt to notify you that this level has been reached. (The total margin requirement is the sum of the margin requirements for all bets in your account.) Once this position has been reached you are at risk of having all your positions closed. Please remember that this notification is only provided as a courtesy and you must not rely on it as it is your obligation to monitor your account.
2. With our transaction based stop loss feature, the platform sets a stop loss for each new bet, equal to the margin requirement. If you wish, you can turn off this feature in your account preferences; however we recommend that you keep this on.
3. You can set a trailing stop loss for any bet. Trailing stop losses can help you take greater advantage of a profitable bet. If the price moves in your favour, then your stop loss will also move in the same direction. Then if the market reverses your stop loss will be triggered at its new level. This can help you to lock in profits for a successful bet whilst continuing to manage the risk of the bet going against you.