CFD margin trading, using leveraging, is perhaps the most powerful advantage of this form of trading. To find out more, read on.
Introducing CFD Margin and Leverage
Perhaps the greatest benefit of CFD trading is the ability to trade on margin, which means that you can command a large and potentially lucrative position using only a small deposit. When you do this, it is also known as taking a leveraged position (as your small amount of money acts as a lever to propel larger amounts).
What Are the Benefits of CFD Leverage?
When you trade on the margin, you give yourself access to the following benefits:
- The confidence of knowing that you can take a position with a relatively small amount of capital;
- The ability to enhance your returns greatly based on only a small amount of investment.
However, it is important to note that not every CFD trade results in profit. When trading on margin you also have the potential to make larger losses than your initial investment.
How Does CFD Margin Trading Work?
An example of CFD leveraging would be that you open a position worth $10,000 in stock with a deposit of 10% (which would be $1,000), giving you leverage of 10:1 on your capital. Potentially, you could make a large profit. Equally, there is the potential for loss. However, if you implement a stop-loss order, you could limit your risk.
CFD Margin Trading in Detail
As can be seen from the above example, a margin reflects the percentage of the full value of a position. This is usually calculated using the applicable margin rate. For certain instruments, different margin rates may apply. This will depend on the size of your position or the tier within that instrument that your position falls into. Each tier will have its own margin rate.
CFD Leverage and Margin Considerations
Trading on margin, using the power of leverage, is not for everyone, as it does expose you to certain levels of risk. However, for experienced traders this can be a very effective way to trade. In fact, CFD margin trading is considered by many traders to be an important means of diversifying their portfolios.