Leverage is Dangerous

Leverage is a significant risk factor that can amplify both positive and negative results… Open a financial spread betting account with IG and don’t utilise leverage then! Just trade up to the that you are confident with, as opposed to taking bigger positions that take you out of your comfort zone. That way you won’t get a margin call or get closed out if it moves against you…

Leveraging merely adds to the risk you’re taking and why compound your risk? Leverage is simply unnecessary. I guess spread betting can be worthwhile if you know how to control the risk. I discovered that I could buy £3m of gold the other day using CMC Markets, a friend of mine was joking I do it. But I would never. The risk of losing very significant sums always exists with spread betting.

As Warren Buffett said: ‘If you are good enough, you don’t need it. If you aren’t good enough, you shouldn’t have it.’  The way to lose money using spread betting companies is to use too much leverage.  If you use it like you were using a normal broker ie no leverage then I see no problem and if you are lucky and your trading comes good then there s no cgt to pay this is if you are lucky enough to be on the right side of the trade.

For instance if I could have bought say £300,000 of Yell with 5% on deposit at 37.25p and closed the position today at 39.7p, then yes, it would have been an excellent trade. £15k down in the account, and a £19,731 tax free profit.

However, if you are starting out then I would advise you to be careful not to utilise much more leverage beyond your balance, which can be a bit more restrictive… I would still use guaranteed where I can, for the first few months. Please be careful out there, after I opened an account with IG in the early days I made some small profits, in the 100’s and then did a little better, but I suffered losses too and over traded to try and catch up – almost to the tune of around 30k! That said I learnt an awful lot and about three years ago had one of my most successful years netting over £100k but then lost about a quarter!

One of my lessons learnt was stops – on TOM i have no stops, my exposure and risk appetite is therefore about £48k. I found with stops they were taken out easily, but you really need them – just think  very carefully around how you use them.

Also, do not over trade or get greedy, my rule of thumb is whatever I am going to invest I immediately half! Ignore the big £ signs, then I half that figure again and invest, once comfortable I increase to the 50%.

I watch L2 like a hawk and tend not to trade unless I can see it! Also run your profits and cut your losses, easier said than done!

Once your account is up and running never never over commit and be careful when averaging up (which is what I am doing) can easily get out of hand!!