Leverage and Spread Trading
As you’re trading with leverage, Financial Spread Trading gives you full market exposure for a fraction of an asset’s price, as our trading examples show. But beware as this is a high risk form of investment.
With Financial Spread Trading, you don’t actually own the underlying financial instrument you’re trading, yet you can still benefit if the markets moves in your favour. Financial Spread Trading can magnify your return on investment, however losses can equally be magnified.
Conventional share trading
You want to buy 10,000 shares in Company Z which cost 260p. You need to pay £26,000 (10,000 x 260p) to buy the shares. Your total exposure is £26,000.
Financial Spread Trading
To get the same £26,000 exposure, you would trade £100.00 per point (100.00 x 260p). However as you’re trading with leverage, your initial investment depends on the margin rate of the asset you’re trading.
If the margin rate on Company Z is 15%, you’ll pay just £3,900 (100.00 x 260p x 15%) for the same £26,000 exposure.
Potential for greater returns
Your initial investment is smaller with Financial Spread Trading, yet your exposure is the same. So there’s the potential to make higher returns.
If Company Z’s share price were to move 10% in your favour, your profit would be £2,600 – a move of 26 points x £100.00 (your stake). That’s a 67% return on investment, even though the asset price only increased by 10%.
Potential for greater losses
Leverage works both ways. If Company Z’s price moved against you by 10%, you’d lose the same £2,600. Which means your net loss would be 67% of your original investment.
That’s why it’s important to consider your attitude to risk you start Financial Spread Trading. While is offers the potential for bigger gains, you could lose part, all or even more than your initial investment if the price goes against you.
Financial Spread Trading can magnify your return on investment. However, losses can also be magnified and so Financial Spread Trading should only be used by experienced traders who are comfortable with the risks associated.
Barclays Financial Spread Trading is provided by GAIN Capital UK Ltd. All dealing, administration and settlement is carried out by them.
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<a href="https://www.barclaystradinghub.co.uk/home/what-is-cfd-trading/leverage-cfds.html"><img src="https://www.barclaystradinghub.co.uk/content/dam/bwpublic/global/images/aspect-ratio-1-0/BTH%20images/Leverage_Infographic_Final-v2.jpg" alt="Leverage and CFD trading" width="640" border="0"/></a><br />Source: <a href="https://wealth.barclays.com">Barclays Wealth and Investment Management</a>
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