The Value of the Stop Loss
Anyone who has approached a spread betting website is aware of the risk that spread betting carries. make sure that their customers know that they stand to lose large sums of money, and advise that they should take every effort to learn the ins and outs of the market before they even start to risk money on it.
However, even the most seasoned professional with a profound knowledge of the market can make mistakes, or be wrong-footed by an unexpected turn of events. Just take a look at the recent crisis in the world economy and you can see that absolutely no one can predict with any certainty what will happen next.
On the real FTSE there is no method of protection, if your portfolio crashes in price then there is very little you can do apart from try and get rid of it at the best price possible. In spread betting, however, there is the possibility of placing something called a stop loss that is designed to protect you from enormous losses. The stop loss is often placed at 80% of your bank (so if you have a bank of £1000, you could lose as much as £800 before your stop loss kicks in) or can be placed at other spots on the scale.
There are a couple of problems with a stop loss. If you put a bet on the markets to increase in value and they took a bad start, your stop loss might see you cancel the bet before a later rally sends the stock careering back into positive territory. This way you will take the loss but not get any of the benefits of the stocks rising, no matter how far they go.
Spread betting companies also point out that no stop loss is guaranteed. This means in practice that stock price lurches can sometimes lead to gaps opening in the market that your stop loss might fall into leaving you unprotected. The most common example of this is when you have a bet on overnight that a stock will rise or fall, and then events during the course of the evening when the stock exchange is closed result in the market opening up the following day up or down by a large margin. If you had a bet on for the market to fall, and a company announces a merger for example, their share price might rocket, meaning that it never progressed through your stop loss, merely leapt right over it, meaning that you could lose thousands upon thousands.
The problem is there is no real method of protection, apart from being careful and trying to avoid overnight bets where possible. If something happens that makes you think you may be at risk, get up early and try and cancel the bet before the stock exchange opens.
Spread betting is a risky practice and can lose punters thousands of pounds, make sure that you pay attention to the markets and keep an eye on your own investments. If you stop paying attention for just a few moments you could stand to lose massively, even with the protection of a stop-loss in place.