CFDs in Detail – an Explanation
What funds do you require to run a CFD
position? Primarily your initial margin, which acts as a deposit against potential losses. So how is the margin calculated, and how is this affected by the placement of your stop-loss order
Trading on margin
What separates CFD trading 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 – this is known as ‘leverage’. For example, you could open a position worth $1000 in Microsoft stock with a deposit of 4% of the full value, or $40, giving you leverage of 25:1 on your capital.
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 your margin
Your standard margin
to open a position with InterTrader is determined by our margin percentage for the market concerned and the total value of your position.
For example, the margin percentage for UK shares is 4%, so the standard margin to open a new position is: your opening price x your risk per point x 4%. To buy 100 shares (i.e. £1 per point), for instance, at an opening price of 320.0, you would need a minimum of £12.80 on your account (320.0 x £1 x 4% = £12.80).
Or to buy one CFD contract (i.e. £1 per point) of our cash UK 100, which has a margin percentage of 0.5%, at an opening price of 6000, you would need a minimum of £30 on your account (6000 x £1 x 0.5% = £30).
Please refer to our Market Info tables
(or use the ‘i’ button on the platform) to see the margin percentage for each market.
How does my stop affect my margin?
As a stop-loss order
limits your risk on a position it will also moderate your margin requirement. By attaching a stop close to your opening level you will reduce your margin.
When you have a stop attached to your position your margin is calculated as 50% of the standard margin requirement, plus your risk per point multiplied by your stop distance (should this total be lower than the standard requirement).
For example, if you buy 10 contracts (i.e. £10 per point) of our cash UK 100 (margin percentage: 0.5%) at an opening price of 6000, with a stop 10 points away at 5990, your margin requirement will be:
((6000 x £10 x 0.5%) x 50%) + (£10 x 10)
= (£300 x 50%) + £100
= £150 + £100
In this case your stop has reduced your margin requirement from £300 to £250. Note that, if your stop was wider so that this calculation exceeded the standard margin requirement, your margin would be capped at the standard level.
Although the stop does help limit your risk, you should be aware that you could lose more than this amount due to slippage or market gaps in volatile market conditions.
For more information on margin calculations please see our FAQs
Your trading currency
When you open a CFD position with InterTrader your trade is made in the currency of the underlying market. So if you are trading UK equities your trade is made in sterling, if you are trading our Germany 30 your trade is made in euros, and if you are trading US Crude your trade is made in US dollars.
Margin requirements are calculated in your position currency and then converted into the base currency of your account (if necessary). Similarly when you close your CFD position your profit or loss is immediately converted into your base currency (if necessary).
Your cost of trading
The cost of trading equity and forex CFDs is taken as a commission on opening and closing your position. For example, to trade Vodafone CFDs you would be charged 0.1% of your position value on opening and 0.1% of your position value on closing.
The cost of trading all other CFDs is included in the dealing spread, much the same as with spread betting
. So, if our spread for the cash UK 100 is 6045-6046, the cost of trading is 1 point x your risk per point.
You should however note that, with undated (non-expiring) markets, we may make adjustments for overnight financing or dividend payments, 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).
Please see our FAQs
for full details of how these adjustments are calculated.