CFDs in Detail – an Explanation
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 proportional deposit – this is known as ‘leverage’. For example, you could open a position worth $1000 in Microsoft stock with a deposit of 20% of the full value, or $200, giving you leverage of 5:1 on your capital.
When trading on margin (also known as taking a ‘leveraged’ position) you can 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.
We offer different margin rates for retail and professional clients, so that larger degrees of leverage are only available to more experienced traders.
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 (for professional clients) is 5%, so the standard margin to open a new position is: your opening price x your risk per point x 5%. To buy 100 shares (i.e. £1 per point), for instance, at an opening price of 320.0, you would need a minimum of £16 on your account (320.0 x £1 x 5% = £16.00).
Or to buy one CFD contract (i.e. £1 per point) of our cash UK 100, which has a margin percentage (for professional clients) 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?
Professional clients on the web and advanced platforms can also use stop-loss orders to reduce their margin requirements. This is called order-aware margining.
For professional clients, 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.
Please remember that order-aware margining applies to professional clients on the web platform only. For retail clients, your stop-loss order will not affect your margin requirement.
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 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 (and US equity 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.