The only Numbers that Matter in your Spreadbet Account

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In the course of my travels through WD Life, I regularly meet up with Investors and Traders of various skill levels and during the invariably enjoyable, thought provoking, and helpful discussions, I get asked how to calculate the value of a Spreadbet Account and how the Cash and Margin/Deposit move around as time meanders by.
 
I must have repeated my blurb/explanation over 100 times (or so it seems) and it has finally dawned on me that if I write a blog about it then the people who don’t find it so easy to indulge with Beer in the Pub with me, can at least read something that might assist their understanding. It is after all, extremely important to know what you are doing when it comes to using Leverage.

And of course it might save me some valuable drinking time if I can avoid having to vocalise my explanation and whilst I am supping Ale, my compatriot can read this Blog !!
 
As I just said, when you are using Leverage, via instruments such as CFDs (Contracts for Difference) and/or Spreadbets, it is vital you understand in detail what you are doing or you will quickly lose an immense amount of money. But, on the flipside, once you have mastered how to use Leverage with respect and in a safe manner, there is simply nothing better when it comes to make big returns and generating cash; whilst at the same time not having to trade like a crazy banshee on acid.
 
So, to help that understanding, I suggest you read or revisit this epic Blog Series I wrote a few years ago and also the Blog below that came out quite recently is probably useful:
 
https://wheeliedealer.weebly.com/educational-blogs/how-to-use-leverage-safely-and-successfully-spreadbetting-and-cfds-part-7-of-7
 
(that’s to Part 7 but there are links at the bottom of it to the earlier parts).
 
https://wheeliedealer.weebly.com/educational-blogs/what-sort-of-returns-should-short-term-traders-be-making
 
I also found this one whilst looking through the ‘Blog Index List’ on WD2 for those other ones:
 
https://wheeliedealer.weebly.com/educational-blogs/how-i-plan-a-spreadbet-trade
 
Just 2 Numbers to Value your Account
When discussing this I so often find myself having to bite my tongue and do my best to stay calm and patient, because it is something so obvious to me, yet my lengthy experience is that few people understand it initially. The unfortunate reality is that Humans seem to have an inbuilt mental mechanism to make things far more difficult than they need to be, and as a general point, chopping out Noise and focusing on what really counts is something few people seem to be good at.
 
But cutting out Noise is really the nub of being in the higher echelons of Investors and Traders.
 
Let me repeat that……
 
But cutting out Noise is really the nub of being in the higher echelons of Investors and Traders.
 
And, you know what, I am going to repeat it again.
 
In bold.
 
But cutting out Noise is really the nub of being in the higher echelons of Investors and Traders.
 
Right, where was I? OK, in your Spreadbet Account (I use igIndex but other Platforms will be sort of similar. If you are not sure, then feel free to DM me on the Tweet Machine or Email me on [email protected] or leave a Comment below this blog or whatever you fancy doing. I am not good at catching Carrier Pigeons though), there are loads of Numbers related to your Account but THE ONLY 2 THAT MATTER are the one that is marked ‘Margin’ and the one that says ‘Available’.
 
To clarify your understanding, ‘Margin’ is your all your Deposits added together that you need to ‘lodge’ with igIndex to enable you to have the Positions open. ‘Available’ is the Cash you have available to use for opening new Positions or to act as ‘Buffer’ – I discuss Buffer further down this Blog.
 
When I use my igIndex App on my Table or Fone, these Numbers appear along the bottom of my Screen along with some other Numbers BUT THOSE OTHER NUMBERS ARE MEANINGLESS AND IRRELEVANT SO STOP LOOKING AT THEM.
 
From this point on I will call those 2 Numbers that matter ‘Cash’ and ‘Margin’.
 
OK, on December 31st of a given year (or at the end of whatever period you measure your Account Performance over but I suggest Calendar Year or perhaps Tax Year are the most sensible) to get the Starting Value of your Spreadbet Account, you need to simply add the Cash to the Margin. That’s it, nothing more complicated.
 
Visualise it in this way. If you were to decide that you wanted to shut down your Account and stop Spreadbetting, then when you do this (for this example let’s just say you can instantly Close any Open Positions and they go at the Price at that point in time) you would get back from igIndex an amount of Money that is the Cash plus the Margin. That is the Value of your Account at a point in time.
 
Hopefully you have now got that. OK, let’s move forwards to December 31st of the next year and you want to work out how your Spreadbet Account has performed over that year. This time you again need the Value of your Account and that is simply your Cash plus your Margin.
 
Let’s assume you had a good year and your Spreadbet Account Value at the end of 31st December is higher than it was at the previous 31st December. Therefore, to work out how your Spreadbet Account has done over the year, then you use the following equation:
 

• Spreadbet Account Value at final 31st December

 

• Minus

 

• Spreadbet Account Value at previous 31st December

 

• Equals your Profit in £s

 

• Divide by Spreadbet Account Value at previous 31st December

 

• Multiply by 100 and that gives you your Percentage (%) Gain for the Year.

 
Obviously, you can do that over any time period and for example if you wanted to do it after 1 week, then you would start with the Value at the end of the week and take away the Value from the start of the week etc. In fact, that is exactly the kind of Calculation I am doing every day when I give my ‘Portfolio’ performance Numbers for the day on Twitter and for the week and for the month as appropriate.
 
Remember – this is all just based on those 2 Numbers, your Cash plus your Margin. Nothing else. Forget all those other Numbers they are not helping you.
 
In all honesty, I couldn’t even name one of those Numbers for you now without looking on my App. They are of Zero use and I never look at them. I just need those 2 Numbers – Cash plus Margin.
 
Think about it logically and practically. If you were to close your Account it makes sense that igIndex would give you back your Cash and anything you had tied up as Deposit. It makes sense.
 
Exposure
I want to write a quick word here about Exposure but it probably won’t be all that long and I refer you back to my Spreadbetting Blogs Epic Series which goes on about Exposure at length and it is vital you understand this. At the risk of being rude, if you do not understand the concept of Exposure, and are unable to estimate at any point in time what your Exposure is, then you should not be using Leveraged Accounts.
 
It’s for your own good……..
 
Got that off my chest. OK, next step is that what I wanted to say here is that at any time I have a rough idea what both my Long and Short Exposure are, and I bet I would be able to nail it to within a few thousand quids. The reason I can do this is because every night without fail, I open up the PDF Statement that igIndex send to me via email and I look at the top left where it tells me my ‘Position Summary’ which shows me what my ‘Position (Net)’ (Aggregate Exposure) is and it has the ‘Total Long Positions’ and the ‘Total Short Positions’ there.
 
The other nifty trick that can help is simply to have a known multiple that you apply to your Margin Number. It depends on what Assets you hold in your Spreadbet Account, but for example, for myself, my Long Exposure tends to be 5 times my Margin when I have no Short Positions in place. When I have some Shorts (Hedges) on, that does complicate it a bit but after a while you get the sense of how much bigger your Exposure is than your Margin and you can use a suitable Multiplier to get a rough idea.
 
If you just Trade Indexes, you may find that your Long Exposure is about 10 times your Margin if you have no Short Trades in place. Up to you, I can’t do everything for you – but feel free to contact me if that bit doesn’t make sense.
 
On your igIndex PDF it has the Exposure at the top and it will have your Margin Number as well. Get in the habit of working out how many times bigger your Exposure tends to be than your Margin. It will help you.
 
The other useful thing with the igIndex PDF is that they itemise each of the Stocks you hold Long Positions on and any Indexes Long or Short etc. If you look at each Line Item, you should be able to see on there what your Exposure for each one is. I don’t look at that often but there are times when this individual Position Exposure is handy to know.
 
It is important to realise that as a Price moves around your Exposure changes. If you hold a Share Position via a Spreadbet for some time, it is easy to find that your Exposure is massively more than you thought it was because it has grown since you opened the Position. A nice problem to have but you must stay on top of this.
 
Cash Buffer
Just for clarity, if you see me ever use the term ‘Cash Buffer’ with regards to my Spreadbet Account, then what I mean here is the Cash in my Spreadbet Account which I always run at around 15 to 20% of my Long Exposure as a kind of Buffer which allows ‘wobble room’ as my Stocks jiggle around and it means I don’t get Margin Calls. In other words, if I am Long only, I am pretty confident that the general Market could drop 10% and it would not cause me problems because my Buffer can easily cope with that sort of move. Obviously I wouldn’t be happy about it but that is why I try to Hedge out my Market Downside Risk.
 
I utterly adore my Spreadbetting Account because although it is immensely challenging to use well, when you get on the right side of things, it is extremely Cash generative and I regularly take dollops of Cash out of it when I need to pay a Credit Card Bill or buy a Car or something !!
 
However, the problem is that when it goes against you it can really sting badly and I have got myself into awkward Cash Flow situations many a time, especially when I cocked up those Hedging Trades badly in recent years. I am shuddering at the thought of those !!
 
For myself, I have a Limit on what I let my Cash get to in my Account. I believe that if you let the Cash get too high then you run a big risk because it can encourage you to open bigger Positions than you ought to or perhaps just too many Positions. You need to have a Limit on your Total Exposure for the Account, and for myself if the Cash gets over my limit, then I take it out in £1000 Chunks as that is dead simple to do.
 
With igIndex I can simply do a few presses on my Tablet Screen and the Cash whizzes over to my chosen Bank Account. Equally, if I need to put more Cash in because my Buffer is getting lower than I would like, then it is simple to just add more Cash direct from my Bank Account in a few presses.
 
How the 2 Important Numbers move over time
In the course of my many discussions about how Spreadbet Accounts work, it always comes up about how the Cash Number increases and/or decreases and how the Margin Number moves around at the same time. So, it makes sense that I try to explain this now and I will probably end up using some Examples because it should make sense that way.
 
Example 1
Let’s assume you have Cash of £10000 in your Account (this is the ‘Cash Available’) and you Open a Long Position on Vodafone VOD and you go for £10000 of Exposure and the Margin Percentage is 20% (It is perhaps less than that in reality but I am just thinking up a simple Example off the top of my bonce). Let’s also assume you have no other Positions and for our purposes here ignore any Dealing Spreads and Interest Charges etc.
 
So at the point of Opening your VOD Long, your Numbers are like this:
 
Exposure is £10000 Long (this will only show up on your Statement at night but you can work it out by multiplying your £s per Point by the Share Price)
 
Cash £8000
Margin £2000
Total £10000
 
Example 2
Now let’s say VOD goes against you by 5%, now your Numbers look like this:
 
Exposure is £9500 Long
 
Cash is £7600
Margin is £1900
Total £9500
 
The way you work this out is that if you first calculate the Margin on the new Exposure of £9500, then this is £1900 which is £9500 x 20%. You know that the drop in the Market is in effect £500 if you had Normal Shares, so £100 of that drop is eaten up as reduced Margin Requirement, and the remainder of £400 eats away at your Cash.
 
Example 3
Now let’s say the Price of VOD goes nuts and soars by 15% (must be a Takeover LOL), so now the Numbers look like this:
 
Exposure rises to £10925 (£9500 x 115%) Long
 
Cash is £8740
Margin is £2185
Total £10925
 
The way you work this out is that if you first calculate the Margin on the new Exposure of £10925, then this is £2185 which is £10925 x 20%. You know that the gain in the Market is in effect £1425 if you had Normal Shares, so £285 of that rise is eaten up as increased Margin Requirement, and the remainder of £1140 adds to your Cash.
 
You can also work out the Margin by taking 20% of the Rise (or Fall) and adding that to the previous Margin (or subtracting if it goes against you).
 
If you are Short, then really it is a similar Calculation and the key is to work out your Exposure after a move, and then calculate the Margin Requirement and the Cash.
 
I think I have seen igIndex use the term ‘Bungee Margins’ or a similar phrase; this reflects the concept that as your Positions rise in value if you are Long, your Margin requirement rises with it. Also, if you are Long and the Position goes against you, then the Margin requirement reduces as the Position size drops (the Exposure falls). So the Margin Requirements can flex both ways and this is actually very helpful at times and makes it easier to keep Positions open.
 
Note, in all cases the Value of your Account if you were to Close the Position and move completely to Cash and to shut down your Dealing Account, is simply the Cash added to the Margin.
 
Clearly my Examples are extremely simplistic because we only have one Position but this should give you some sense of how the Cash and Margin Numbers move as the Prices of your Positions wiggle around during the day. From the second Example it must be easy to realise how the Cash grows quickly if the Position goes in your favour to a considerable degree – this is one of the real beauties of Spreadbets in my view, but you must understand the Dangers and respect them.
 
I hope that just about makes some sense,
 
Regards, WD.