Financial spread bets are margined trading products, allowing you to leverage your initial investment. This means that you are only required to have a small percentage of the full value of your spread bet available as a cash deposit, so freeing up capital.

For example, in the case of a spread bet on a UK 100 share, the typical requirement is 15% of the full value of the spread bet.

A traditional share transaction requires the full payment of £5,000 to purchase £5,000 worth of shares, plus commissions and Stamp Duty. However, £750 of margin is all that is required to open a spread bet in the equivalent of £5,000 worth of UK 100 shares.

Problems can often occur when this difference in risk potential is forgotten, in this instance if the spread bet is regarded as a £750 risk to the market, rather than as a £5,000 risk.

If you bought £5,000 of physical shares, the most you could lose if the share price were to fall to zero, is £5,000.

Similarly, a spread bet on £5,000 worth of shares also has a maximum loss of £5,000. The difference is that the physical share trade requires payment of the full £5,000 (plus commissions and Stamp Duty) to enter the trade, whereas the spread bet only requires an initial £750 of margin.

The maximum potential loss is the same for both transactions (plus commissions and Stamp Duty for traditional share trading) but the maximum potential loss in spread betting is greater than the initial deposit.