Trading 101: How to calculate CFD margins
What are CFDs?
Contracts for Difference (CFDs) allow traders to speculate on rising and falling prices of financial assets without needing to own the underlying asset. The CFD refers to the contract made between the trader and broker without having to go through an exchange. Both parties will agree to pay the difference in price movement from the opening of the position to the closing. By placing a small initial deposit the trader can gain full exposure to the market, the deposit is then used as leverage to open larger trades. As a result, leverage can magnify a trader’s profits but in the same respect, losses can also be magnified. Find out how you can start trading CFDs with Eightcap.
What is a CFD margin?
The deposit you make when trading with CFDs represents a percentage of the contract’s full value. This deposit is known as the margin and it allows traders to open large positions while essentially investing a fraction of the value. The trader will gain full exposure to the position. It is also advised that your trading account should hold extra funds to cover any potential losses and stop your account going into a margin call. Always remember that leverage is a double-edged sword, while it can maximise your profits, it can also increase your losses.
How do you calculate 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 30:1.
For more information on Eightcap’s margins, please contact us directly.
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