Margins are a changing!
31/03/2008
In my newish book Naked Trader.... (Note the way I get a plug for it right in the opening sentence... right well I may as well also add it's available from the ADVFN bookstore on this link click here to order)... I said in the spreadbetting chapter that spreadbetting firms try and give you as much credit as they can. Well because of the credit crunch this is no longer the case. In fact, the credit crunch is actually hitting us smaller private investors right in the pocket as spreadbet and CFD firms tighten up credit terms. Cantor Index, IG Index and MF Global are among many companies who've pushed up margin rates. What does it all mean? Instead of spreadbetting clients only having to put up say 10-30% of the amount of an actual position taken some of the rates have gone up to as much as 90%. So for example, MF Global clients used to spreadbetting shares in small cap companies now find themselves having to put up nearly all the money (90%) rather than using credit. This has meant a lot of forced sellers in the market over the last couple of weeks, which in some cases has increased the falls for some - particularly the smaller companies. I got a call myself asking for £17,000 to cover positions. And like many private investors I just sold them off instead. So if you are the owner of shares in some of the smaller companies and wonder perhaps why they got hit more than some others; that could well be one of the reasons. Why are they doing this? Simply - and they are right - they're worried some PIs who extended themselves with too much credit might end up going bust and not be able to pay their bills. I think some of the firms could really have given us all a little more time before upping margin rates overnight. But.... in the long term I think it's all pretty sensible. I always thought it was asking for trouble allowing anyone to be able to buy £10,000 of shares and only have to put up £1,000. Most of the firms now run a kind of staged margin - so perhaps a FTSE 100 share might now be 20%, a FTSE 250 40% and a smallcap 50%, or in some cases 90%. I think 20%-40%-50% would be about right and if I owned a spreadbet company that's what I'd go for. It'll be interesting to see how things develop - I reckon that is probably about it and we won't see any more margin changes for quite a while and perhaps they might even come down again after the credit crunch has played itself out.
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