CFDs in Detail
Here we break down the various costs and deposits required to run a CFD position. The most significant of these is the margin deposit, but you should also take note of the possible dividend adjustments and overnight financing (which can be debited from or credited to your account). These are designed to reflect as closely as possible the effects of an actual physical purchase (or sale).
Trading on margin
What separates CFD trading from traditional types of investments is the ability to “trade on margin.” Margin trading allows you to command larger position sizes using only a small deposit. For example, when trading on 10:1 margin, clients are only required to deposit 10% of the total value of the position. If you are interested in buying $100 in Microsoft stock, for example, you will only need to deposit $10 for that trade.
When trading on margin (also referred to as taking on a “leveraged” position), clients may be able to greatly enhance the profit potential since position sizes can be much larger than the size of your deposit. It should be noted though that margin trading creates an equally large possibility for losses, if the price moves in an unfavourable direction. Experienced traders generally recommend that margin trading and position sizes are approached with a conservative mindset.
How to calculate Initial Margin (IM)
The Initial Margin (IM) is the amount of unencumbered trading resources required to open each trade. The minimum IM is the minimum Initial Margin required to open a particular trade. You can calculate the minimum level of funds required to open a new position by multiplying the minimum IM by your stake. For example, the current minimum IM for the UK 100 Index Future is 30, therefore if you wish to trade £5 per point you need a minimum of £150 available funds on your account (30 x 5 = 150). The minimum IM varies depending upon the market. Please visit our Market Information pages for minimum IM levels for each market.
What is an Automatic Stop Loss Order?
We will automatically assign a stop loss order to every trade placed on your account. This stop loss is based on 80% of the Initial Margin that is applied to the trade. For instance, if you have £2000 in your account and you trade the UK100 Rolling Daily at £10 per point, the system will automatically allocate a stop loss 120 points away (because the maximum Initial Margin for the UK100 Rolling Daily is 150 and 80% of 150 is 120). You would also have £500 remaining as available funds on your account. Alternatively, if there are insufficient trading resources to cover the maximum Initial Margin, the system will allocate the stop level based upon 80% of the amount that was taken as Initial Margin, which would be the total trading resources available on your account. You may amend your stop loss to whatever level you desire, subject to the minimum stop loss distance for each market and the margin requirements. Although the automatic stop loss does go some way towards limiting your risk on your open trades, you must be aware that all orders including stop losses are subject to slippage and market gaps unless you specify for your stop loss to be guaranteed. The minimum and maximum Initial Margin requirements vary depending on the market.
Cost of trading
The cost to open a CFD position is included in the dealing spread, much the same as with spread betting.
While your position is open your account is also debited or credited to reflect the financial cost or benefit of holding the equivalent physical purchase. For instance, if you held a long position your CFD account is debited overnight financing, based on the applicable interest rate of your trading currency, for as long as you hold the position. Likewise you can be credited (but not always) overnight interest when you hold a short position.
Your account will also be credited or debited to reflect the value of any dividends on shares that go ex-dividend when you have a relevant CFD position open. If you are long you will receive 80% of the dividend, while if you are short you will be debited 100% of the dividend.
Payment is credited or debited to your account on the ex-dividend date. Dividend adjustments apply to equity and index markets.