Spread Betting: Stop Losses or Guaranteed Stop Loss Orders?

A stop loss is a tool that should be used by everyone who trades stocks on margin through spread bets.  A stop loss order works by cutting your spreadbet off at a pre-determined point that you define when you initiate the trade.  Setting a stop loss provides downside protection and allows you to calculate the loss you are prepared to take on any one trade.

In spread betting a stop loss can also act as a means of locking in profit near the price point you wish the trade to be closed, if the stock is not performing. Therefore, when the stock is profiting, you can steadily adjust this stop loss level to begin to lock in more and more profit. When the share begins to trace back (up/down, depending on your trade), you will be closed out and the stop loss executed.

So for instance if you open a long spread bet on PV Crystalox Solar plc [PVCS (London)] stock which is trading at 70p with a stop loss order at 65p and PVCS falls in price the bet is closed at 65p (for a loss).  When protecting your trade with a stop loss order, you will sometimes be stopped out a little away than the exact point you set it at, therefore resulting in either a little less profit or slightly bigger loss. This is because a stop loss takes a few seconds to close out the trade, by the time this process has completed and depending on how volatile the trade is, then you will be closed out near the actual stop.

While a stop loss is useful in limiting losses it is not foolproof.  Let's say PV Crystalox Solar plc (PVCS: London) were to issue a surprise profit warning and the share price immediately fell from from 70p to 58p immediately in one sweep.  The stop loss here would be broken and your spreadbet would be closed at 58p rather than 65p because the stock never traded at 65p.

To protect against this occurrence spread betting providers offer a solution in the form of a 'guaranteed' stop loss for an additional small premium.  If you want to make sure that your spread betting trades get stopped out at a definite point then you can use a guaranteed stop loss order.  This is fundamentally the same as a stop loss order, except you will be closed out at the point you requested, no matter how volatile the stock is. There is usually a small fee charged for this which differs from broker to broker. The most common being a change in the initial spread, adding a few points either side or charging a percentile fee which is based on the trade type and the value of your trade which is taken from your account margin.  Whether or not you are willing to pay for the additional cost of the guaranteed stop loss depends on the degree of risk you are willing to absorb but in these hyper-volatile markets using guaranteed stop loss order can be a good idea.