How to calculate CFD margins
What is a CFD margin?
When engaging in a Contract for Difference, you are only required to deposit a percentage of the contract’s full value. This is called a margin and it allows traders to open large positions while investing a fraction of the value. The margin is used as leverage, giving traders full exposure to the position. A margin is required before opening a position on your account. Your account should also hold extra funds to cover any potential losses and stop your account going into margin call. Always remember, leverage is a double-edged sword. While it can maximise your profits, it can also increase your losses.
Calculating the margin
The margin, or margin percentage, is determined by your CFD provider. Each product is set at a different rate; whether it’s Forex, indices or commodities. Some margins (deposits) can be as low as 0.5% of the position’s value. This allows traders to spread their funds over several products. To calculate your deposit on an index CFD for example, you would multiple the index value by the margin percentage.
AUS200 value x 0.5% = margin payable per contract
5553 index points x 0.5% = $27.76 per contract
You pay $27.76 as a margin to open one contract.
JPN225 value x 1% = margin payable per contract
21,194 index points x 1% = $211.94 per contract.
You pay $211.94 as a margin to open one contract.
Different types of CFDs
Eightcap clients can trade 8 of the world’s most popular indices through Metatrader 4 (MT4) and Metatrader 5 (MT5). Indices aren’t the only products offered as a CFD. Clients also have access to commodity prices, including oil (Brent and West Texas), gold and silver and cryptocurrencies like Bitcoin.
Forex trading is a little different, instead of looking at individual markets your account will be set to a leverage rate. There are several leverage options available to traders, from 1:1 up to 500:1. Popular leverage rates used by retail traders are generally 50:1 – 100:1 and 200:1. This is not an exact science as traders different account balances and risk management systems.
For more information on Eightcap’s margins, please contact us directly.