How to hedge you spread bets with a stop loss.
Your liability when placing a spread bet can be described as the potential losses you could incur should the market move heavily against your position.
Some markets, such as 'Total Goals' in a football match are not very volatile, in that the total number of goals in a game rarely rises above 6 and can obviously not be less than zero. However, markets such as the total number of runs in a cricket Test Match innings and many financial markets are very volatile with, in some case, potentially unlimited losses.
You are able to limit your liability when placing a spread bet, by using a 'stop loss'. A 'stop loss' can limit your losses whilst at the same time not limiting your potential gains.
The workings of a stop loss are best explained using an example; we'll use the individual shares market. Say, for example, the spread offered for Vodafone is 136-137. You are anticipating a fall in price so you sell £10/point at 136 and place a stop-loss, for example, at 142.
This means your profits will increase the further the Vodafone share price falls. However, if the share price rises above 142 your losses will be limited to 6 x £10 = £60.
Unfortunately, this approach is not fool-proof. If Vodafone were to suddenly make a very positive announcement and the share price subsequently jumped, for example, from 139 to 157, your stop-loss would not have a chance to be actioned at 142 and you would lose 21 x £10 = £210.
However, some spread betting firms will accept a guaranteed stop loss which guarantees that the stop loss price will be honoured even if the spread makes a sudden jump. The disadvantage in requesting a guaranteed stop loss is that the spread quoted will normally be bigger, which will slightly reduce your potential profit and slightly increase your potential losses.
The disadvantage of placing a stop loss is that you can end up making a loss even though, over the period of the spread bet, you would have made a profit. For example, if Vodafone's share price was to touch 142, even for a few minutes, but then suddenly fell to 131, your stop loss would still be invoked and you would make a £60 loss. If you had not placed the stop-loss you would have made a profit of 5 x £10 = £50.
Some spread betting firms will offer special accounts or markets where a spread bet is automaitically subject to a maximum stop-loss. This means you will know the most you can win or lose every time you place a bet.
More Information:
Compare share dealing accounts via money.co.uk
