Spread Betting Guaranteed stops
In spread betting a guaranteed stop loss order is where the broker guarantees to close a bet when the price reaches a certain point. When you set a non-guaranteed stop order the broker will try their best to close the trade at the specified price, but markets are continually moving and it is normal for the stock to move a tick or two before the stop is actioned. This is called slippage and in most circumstances doesn't make much difference to your profits. Sometimes however there is a risk that the broker for various reasons won't be able to take you out of your position before the price has moved significantly, causing potential big losses. A guaranteed stop loss is designed to protect you from these situations.
When might you use a GSLO
- If the stock has a history of gapping i.e. jumping from one price to another.
- If you are concerned about holding overnight positions.
- If the company whose shares you are betting on is in some kind of negotiation e.g. take-over or merger talks or even possible meetings with an administrator.
- If you aren't able to monitor your bets because you are on holiday or at work.
- If you are new to spread betting and want peace of mind.
Disadvantages of guaranteed stops
Not available on illiquid stocks
Because the brokers don't want to take too many risks themselves, the shares they offer without GSLOs are often the very ones you would want a spread betting guaranteed stop on - i.e. illiquid stocks prone to gapping (occasional sudden jumps from one price to another). It's generally much easier to get a GSLO on a FTSE 100 company.
It costs
Almost every spread betting company will make a charge on a guaranteed stop. Prices will vary from company to company but generally you expect it to double your transaction costs, which can considerably eat into your profits. Typically the cost is 0.25 - 1% on top of the order price.
Price limitations
There is almost always a limitation on the level of your GSLO in terms of how close to the current price you can set it. Many firms require your stop to be about 10% above or below your order price.
Harder to set and cancel
Some brokers won't let you set a GSLO online and will force you to contact them by phone. Also once you have set up the stop it is not as easy to update or cancel as a regular stop so you need to be sure of your stop level at the outset.
Alternatives to guaranteed stop orders
If you are concerned about the cost and limitations of GSLOs there are ways to protect your positions without resorting to guaranteed stops. If for example you are going short (sell order) on a share, you could set up a buy order to trigger at a particular level above the current price. Therefore if something goes wrong and the price rises it will undo some of the damage.
Diversify your positions. Think about opening many positions at a smaller stake rather than a few at a larger stake. That way if something does go seriously wrong with one bet you only stand to lose a smaller amount.
Which companies offer guaranteed stops?
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