What Is Margin in CFD Trading?
When trading contracts for difference (CFDs), you will surely encounter the aspect of margin.
It is actually impossible to pursue trading in such field without dealing with it first.
This is because this is a requirement for many platforms.
In a general point of view, what this refers to is for a trader to maintain a specific amount in the account as a form of security.
The amount is commonly determined by the broker or the market maker, which usually ranges only from 0.
5% to 30% of the price of the position.
Margin: an advantage or not? For some traders, this is actually an advantage.
This is because they do not have to have to put up the full amount or the notional value of the product, which is, in this case, is the CFD.
This will then allow a trader to trade a large position with just a very small capital.
Having said this, it can also amplify the potential or possible profits or losses of a trader from the position.
However, on the other hand, taking a leverage position in a naturally volatile kind of contract for difference may expose the buyer to a downturn in a margin call.
In most cases, this situation may lead the investor or trader to lose substantial parts of his or her assets.
2 Types of Margin: Initial and Variation There are two (2) major types of a margin when it comes to CFD trading.
These are the initial margin and the variation margin.
As a matter of fact, the science behind these types of margin is similar to those that are being applied for financial spread betting.
On the one hand, the initial margin refers to the amount that is required from the investor or trader in order to open a position in contracts for difference.
This is typical between 35 to 30% for stocks and shares while it is usually at 0.
5% or 1% for indices as well as commodities and foreign exchange.
Most investors refer to this type as the deposit.
The percentage rate for the margin varies depending on the quality of the asset being traded.
For instance, if you are going to trade a large and relatively liquid stock, then the initial margin can be 3%.
Aside from that, the rate also depends on the broker.
For stocks with smaller capitalization and lesser liquid, the margin is usually higher.
On the other hand, variation margin is commonly called as well as maintenance margin.
This is being applied to a position when it moves against the direction that is favorable for the client.
For instance, if the peg of the trader is higher than what is currently in the trend, then this can be used.
It is actually impossible to pursue trading in such field without dealing with it first.
This is because this is a requirement for many platforms.
In a general point of view, what this refers to is for a trader to maintain a specific amount in the account as a form of security.
The amount is commonly determined by the broker or the market maker, which usually ranges only from 0.
5% to 30% of the price of the position.
Margin: an advantage or not? For some traders, this is actually an advantage.
This is because they do not have to have to put up the full amount or the notional value of the product, which is, in this case, is the CFD.
This will then allow a trader to trade a large position with just a very small capital.
Having said this, it can also amplify the potential or possible profits or losses of a trader from the position.
However, on the other hand, taking a leverage position in a naturally volatile kind of contract for difference may expose the buyer to a downturn in a margin call.
In most cases, this situation may lead the investor or trader to lose substantial parts of his or her assets.
2 Types of Margin: Initial and Variation There are two (2) major types of a margin when it comes to CFD trading.
These are the initial margin and the variation margin.
As a matter of fact, the science behind these types of margin is similar to those that are being applied for financial spread betting.
On the one hand, the initial margin refers to the amount that is required from the investor or trader in order to open a position in contracts for difference.
This is typical between 35 to 30% for stocks and shares while it is usually at 0.
5% or 1% for indices as well as commodities and foreign exchange.
Most investors refer to this type as the deposit.
The percentage rate for the margin varies depending on the quality of the asset being traded.
For instance, if you are going to trade a large and relatively liquid stock, then the initial margin can be 3%.
Aside from that, the rate also depends on the broker.
For stocks with smaller capitalization and lesser liquid, the margin is usually higher.
On the other hand, variation margin is commonly called as well as maintenance margin.
This is being applied to a position when it moves against the direction that is favorable for the client.
For instance, if the peg of the trader is higher than what is currently in the trend, then this can be used.