# Margin and Exposure

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3 The advantages of trading on margin Comparing share trading with Spread Betting...06 Overnight financing costs...07 Going short Types of Spread Betting contracts...09 More examples of working out margin on shares...10 Notional Trading Requirement (NTR)...11 Your exposure and risk UK equity trade example Selected risk Deposits and margin calls...18 Liquidation orders...21 Summary Test your knowledge

7 Overnight financing costs When you hold a spread bet position overnight there is a small financing charge to pay because you are trading on margin and not paying for the shares in full. This is similar to a mortgage where you buy a house with money borrowed from a bank using a small deposit and pay interest back in return. As you are in effect borrowing money from us just like a bank, we charge our clients a cost of borrowing. This is an overnight financing cost you are charged each night you hold a long position open (you have bought). We charge our clients the London Interbank Offered Rate (LIBOR*) + 3% each night. If we assume the LIBOR is at 5.0% at the moment, adding 3% gives you an annual financing rate of 8.0%. We will apply this rate to the total exposure of each position you are long (you have bought) after 10pm UK time each night. In our previous BP spread bet example the total exposure is x 2 a point = x 8.00% (LIBOR* + 3%) = 80 divided by 365 (days in the year) gives you a financing cost of 0.22 each night. It is also worth noting that when you are short (you are selling) we pay you interest. Let s look at that in more detail on the next page. *Using a LIBOR rate of 5.0%. 7

8 Going short If you have a short position on (you have sold) a particular share with the Daily Rolling Cash bets, we pay you interest for every day you hold the position after 10pm each night x 2.0% (LIBOR* - 3%) = 20, divided by 365 (days in the year) gives you a credit of 0.05 each night. If we still look at our BP example, and you had decided to go short (sell) at for 2 per point, once again your total exposure would have been You then multiply your total exposure ( 1000) by LIBOR - 3%. Remember we do not debit or credit you with any overnight financing costs if you close out of your positions before 10pm UK time each night. However we do offer you two different spread bet contracts. Let s have a look at the different types of spread bet contracts you can choose from. 8 *Using a LIBOR rate of 5.0%

9 Types of Spread Betting contracts This spread bet has a slightly wider spread than the Daily Rolling Cash bet, but we have built all the overnight financing charges into the price at a discounted rate. The quarterly spread bets run for three months from March, June, September and December, although you can close them out at any time. As each day passes, the quarterly spread bet price will come closer to the Daily Rolling Cash bet until it expires. It can be possible that the price of the quarterly bet is lower than the rolling cash price just before it expires. 1. Daily Rolling Cash The Daily Rolling Cash bet has our narrowest spread and is the best contract to trade if you plan to hold a position that you are long (you have bought) for the short term. 2. Quarterly bets If you want to hold an equity spread bet for the medium term and you don t want to have to keep paying the interest each day, we suggest that you use our quarterly spread bet contract. At the start of each contract three months financing charges, fair value and some market sentiment are built into the price. Both the Daily Rolling Cash bets and quarterly bets can be closed out at any time and are automatically rolled over. So, they will continue to run to the next day or the next quarter until you close them out. 9

10 More examples of calculating margin on shares bets Here is another example of trading stocks on margin. Suppose you wanted to buy (go long) BHP Billiton (BLT) 2 per point at How much margin would you have to put forward to open the position? The share price to buy is multiplied by pounds a point ( 2) = This is your total exposure. You then multiply your exposure by the margin you need which in this case is just 3%. In this example the money you need to trade on margin is 3150 x 3% = We will take that amount, called the initial margin, out of the money you have on deposit with us. For every point movement BHP Billiton goes up in value your remaining deposit will go up by 2, for every point it goes down in value, your remaining deposit will go down by 2. The remaining money that is not being used is known as your Free Equity or Variation Margin. A full list of stock margins is available in the dealing guide but as a general rule: Top 30 UK100 3% Rest of the UK100 5% UK250 and small caps 10% AIM stocks 20% European and US stocks 5% You can have as many open positions as you require, as long as you have enough free equity to cover your margin requirement. 10

12 Nothing happens until I make it happen. Scott Wilson

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15 minimise risks. UK equity trade example Suppose you want to trade British American Tobacco (BATS) at 1 a point and it is currently trading to buy at Your total exposure would be 1800 (1800 x 1 a point). We will explain in Module 3 how stop losses and guaranteed stop losses can limit your potential losses. The level of risk on this trade will be the same as if you bought 1800 worth of physical stock. If BATS dropped from to zero, your total loss on our spread bet would be 1800, which is what you would lose if you had bought the physical stock. These are essential if you want to 15

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19 If this falls to 0 you will receive a margin call . We offer a graphical representation of our clients equity positions. A bar shows the difference between your total equity and the total margin you are using. The green bar shows the percentage of total equity that is free equity and the grey background shows the percentage of total equity that is used as margin. If the free equity falls below zero, the green bar will become red. When your account falls to this level you will be on margin call. 19

20 The next day PRU issues a profit warning because of heavy damage in the US caused by a hurricane. This leads to a massive insurance payout, and the share price drops to Your account now looks like the image to the right. As your total free equity has now fallen into a negative balance, you would be on a margin call for this debt of 85. Once your total equity balance falls below your margin requirement, we would recommend that you place a stop loss order with us to try to avoid your account balance falling into negative equity. We will cover stop losses in more detail in the next chapter. 20

22 Now you should be able to: P P P P Understand the different margin requirements Calculate your margin requirements across all our instruments Calculate the total exposure on each trade that you do Understand risk/reward and know the procedure for margin calls and the situations leading to them 22

24 Notes and calculations on margin and exposure 24

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26 7. At least 2:1. Answers for page x 2 per point = 3804 total exposure multiplied by the 5% margin requirement equals The NTR for Gold is 30 points, 30 multiplied by 3 equals All overnight financing rates on equity spread bets are calculated with LIBOR+/- 3%. 4. You receive interest on short equity positions. 5. Notional Trading Requirement. 6. The NTR for the UK 100 is 50 Points. 8. The share price of multiplied by 5 per point equals 1050 total exposure. 26

27 We hope you found this module useful and interesting. If you want to know more then contact one of our educational advisers on Or visit cmcmarkets.co.uk/education for more details of our seminars on the subject. Risk Warning Remember Spread Betting is a leveraged product and carries a high level of risk to your capital. It is possible to incur losses in excess of your initial stake. Spread Betting may not be suitable for everyone, so ensure that you understand the risks involved and seek independent Margin advice and Exposure if necessary. 27

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