Trading On Margin
Leveraging your Investment
The greatest advantage of margin trading is the ability to leverage relatively small investments for a much greater market effect. This is particularly attractive to short-term, intra-day investing where price swings are typically more limited than over longer periods. The amount you can leverage your investment depends on the margin requirement. The maximum leverage is:
10 times for stock CFDs – on the 23 stock exchanges we currently support
For example, an investment of only GBP 2,000 can be used to command the equivalent position of up to GBP 20,000 worth of stocks on the market.
20 times for stock index CFD's – for the 16 major indices we support
For example, an investment of only GBP 10,000 can be used to command a stock index position of up to GBP 200,000 on the market.
How Margin Trading Works
When trading CFDs, you deposit funds into your account which allows you to open and close stock positions for many times the value of your deposit. The amount you deposit is known as the "margin collateral".
When you open a trade position, a percentage of your collateral is required to cover the position, and this amount is reserved in your account. The amount of collateral required to cover a position changes whenever the market price of the position changes. So if you already have open margin positions, the margin available for new positions is continually changing.
Margin Calls
Margin trading can work against you as well as for you, and under normal circumstances your account will not be allowed to go into debt. If the price of an instrument goes far enough against your position and your margin collateral is becoming insufficient to cover the resulting loss, you will be required to close or reduce positions, or to deposit more margin collateral to cover the new margin requirements. If you fail to take appropriate action, positions may be automatically closed on your behalf.
Margin Calculation Example
In this example we will use a stock CFD with a margin requirement of 10% and you have margin collateral of GBP 100,000 giving you up to GBP 1 Million available to invest on the market.
Say you buy CFDs for GBP 400,000 using 40% (10% * GBP 400,000 / GBP 100,000) of your available margin collateral. At this point, you have up to GBP 600,000 available to invest in other CFD positions.
If the market moves with your investment
If things go well, and the value of stocks in your CFD position go up by 2% and you close the position, you make GBP 8,000.
If the market moves against your investment
If the market value of your CFD position drops to GBP 320,000, your Available Margin drops to GBP 20,000 (GBP 100,000 - the loss (GBP 400,000 - 320,000)) and now only covers 6.25% of your investment (GBP 20,000 * 100 / GBP 320,000) - you have exceeded your margin and must take steps to remedy the situation:
- Transfer additional funds of at least GBP 12,000 to cover the new margin requirements of GBP 32,000. Note that transferring GBP 12,000 will bring your Available Margin back to 10% of your position (10% of GBP 320,000) but if the CFD position falls further you will immediately have exceeded your margin again.
- Reduce the CFD position by selling the appropriate number of shares equaling at least GBP 120,000 to bring your position down to GBP 200,000. Again, this will bring your Available Margin back to 10% (on Margin) of your position (10% of GBP 200,000), but if the CFD position falls further you will immediately have exceeded your margin again.