We have touched on how CFDs work and the basic differences between shares and CFDs, now it’s time to explore the specific characteristics of CFDs in more detail.
CFDs and trading itself, has a unique language that you may find new. If there is a term that you aren’t familiar with, check out our glossary (the book icon in the menu below) for a brief explanation.
Margin is the amount of deposit required to secure a position. Margins are:
- between 1% to 50% depending on the nature of the underlying product.
- calculated as a percentage of the notional value of the position
- held in reserve in the traders account so that the CFD provider is covered if a position moves against a trader
- returned to the traders account when the position is closed out
- at the discretion of the CFD provider and may be increased at any time for any reason (e.g. as result of the suspension of trading of the underlying product
- determined by a range of factors including the liquidity of the underlying product and its capitalisation
Leverage is the ability to take a position with notional value greater than the cash outlay required. Leverage is often known as gearing. Investors use leverage when they borrow money from a bank to invest in an investment property. You can also borrow money to buy shares and this form of leverage is mostly done through taking out a margin loan.
Leverage has the effect of magnifying a trader’s profits and losses.
When used wisely and appropriately using leverage can be a big boost to profitability and capital building.