What Is CFD Leverage?
Leverage is one of the main reasons why traders are attracted to trading CFDs and FX. So what is leverage when CFD trading?
By utilising a leveraged trading product like CFDs, a trader can gain access to large position sizes by paying just a small fraction of the actual trade value. This is very much unlike traditional stock investing, where you need to stump up the full amount of cash in order to buy the shares.
Understanding (and respecting) leverage is crucial when you trade CFDs, FX or any other leveraged trading product. If you fail to understand what leverage is or how it works, you could financially cripple yourself very quickly.
Using CFD Leverage Is Like a Mortgage When You Buy a House…
Unless you’re lucky enough to buy a house with cold-hard cash, you’ll probably have to take out a mortgage from the bank in order to make the purchase. If the home is worth $1m, the bank will likely require a 20% deposit in order to secure the bank loan. That’s $200k you will need to stump up.
This scenario is similar to leveraged trading – you only need a small amount of capital to control a much larger position. For instance, you may want to buy 100 CBA shares. That would cost you $10k in your bought the stock from the ASX exchange. However, if you did the same trade using CFDs, your broker might only require say 10% ($1k) of that in order to open the trade.
Trading On Margin – What Is This?
Trading on margin is the deposit requirement needed in your trading account in order to open a trade. The margin required is always a small fraction of the actual value of the asset you wish to trade and the amount of margin required will vary depending on several factors (the product/asset class, volatility of the market, liquidity etc.).
For example, a CFD broker offering leverage of 200:1 on the ASX 200 Index has a margin requirement of 0.50%. If you wanted to open a BUY trade and had $1,000 in your account, you could access up to $200,000 in notional value (on the ASX 200 Index).
Margin and leverage are similar concepts but it’s important to note that they are not the same concept. Leverage is the act of taking on debt, whereas margin is a form of borrowed money. In effect, you can use margin to create leverage.
Examples Of CFD Leverage
You want to buy 1,000 BHP Billiton Limited (BHP) shares when the price hits $28. In traditional share trading, you’d need $28,000 (1,000 x $28) to buy these shares. However with CFD trading, you only need to deposit a small % of the total trade value in order to open a trade. Broker XYZ has a margin requirement of 10% on BHP (leverage of 10:1). In this scenario you’d need just $2,800 (plus commission) in your trading account to open this trade.
You want to open a BUY trade on AUD/USD at 0.8000. TradeDirect365 offers leverage of 200:1 on FX trades which represents a 0.5% margin requirement. You want to BUY a standard lot (100,000) – notional value of this trade is $80,000 (100,000 x 0.8000). With a 0.5% deposit/ margin requirement, you’d need c., $400 ($80,000 x 0.05%) in your account to open this trade.
Profits AND Losses Can Be Magnified With Leveraged CFD Trading
If you’ve read and understood the information on leverage above, you’ve probably come to the conclusion that leveraged trading has many benefits, notably that it frees up your capital for other investments and profits can be magnified very quickly.
These benefits are great but it’s imperative to note that, losses can also be magnified with leveraged trading. In fact it’s more likely that you’ll lose money trading CFDs. Therefore it’s important that you understand all the risks involved before opening an online trading account. Remember, it’s possible to lose much more than your initial deposit if the market goes against your trade/s.
Who Are The Best CFD Leveraged Brokers To Trade With?
There are a large number of online brokers that offer leveraged trading, in fact there are too many! In the table below you’ll see some of our preferred CFD & FX brokers – all are ASIC-regulated and reputable brokers to trade with. Please remember your capital is at risk when trading.
Who are they?
Segregated Bank Accounts?
ASX Stock Commission
Australia 200 spread
Wall St 30 spread
0.07% with $5 min.
0.9pts - FIXED
1pt - FIXED
0.6 pips - FIXED
No ASX stocks
From 0.5 pips
Fixed & Variable
cTrader or MT4/ MT5