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 spread betting from traditional types of investment 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, you only need to deposit 10% of the total value of the position. You could open a position worth $100 in Microsoft stock and only deposit $10 for that trade.
When trading on margin (also known as taking a ‘leveraged’ position) you can greatly enhance the potential return on your capital. You should note 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 is 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 risk per point/pip. For example, the current minimum IM for the UK 100 cash index is 30, so if you wish to trade five CFD contracts (i.e. £5 per point) you need a minimum of £150 available funds on your account (30 x £5 = £150).
When trading shares, the IM is calculated as a percentage of the full position value. For example, the minimum IM for the leading UK shares is 3% and the maximum IM is 10%, so the minimum margin to open a new position is: your opening price x your risk per point x 3%. For example, to buy 100 shares (i.e. £1 per point) at 320.0 you need a minimum of £9.60 on your account (320.0 x £1 x 3% = £9.60).
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 is based on 80% of the Initial Margin applied to your trade. For instance, if you have £2000 in your account and you trade 10 CFDs of the UK 100 cash index (i.e. £10 per point), we will automatically allocate a stop 120 points from your opening level, because the maximum Initial Margin for the UK 100 is 150 and 80% of 150 is 120. From the £2000 on your account, £1500 would be used as margin for this position, and the remaining £500 would be available to use as margin on other trades.
Alternatively, if there are insufficient trading resources to cover the maximum Initial Margin, we will allocate the stop level based upon 80% of the total trading resources available on your account. You may amend your stop to whatever level you desire, subject to the minimum stop distance for each market and the margin requirements. Although the automatic stop does help limit your risk on your open trades, you must be aware that all orders are subject to slippage and market gaps unless you specify for your stop to be guaranteed (please see our Market Information pages for Guaranteed Stop charges). 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 hold 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.
To view the full calculation of overnight financing adjustments, including specific examples, please see our FAQs.
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.