Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Margin is a key concept to grasp in trading: it is the money you need to lay down in order to open a leveraged trade. Margin and leverage are related terms. In short the leverage ratio determines the amount of margin you need to have in your account.
Margin rates vary across different regions and asset classes. Leverage allows you to gain full exposure to a market by investing only a fraction of the capital you would normally require. Upon opening a transaction, the margin value will be required and held as collateral to be maintained until termination of the relevant transaction. The amount of the margin payments is dependent on the leverage ratio of the CFD, the underlying financial instrument and the contract value of the transaction.
If you are trading FX with a leverage ratio of 30:1 – equivalent to a margin rate of 3.33% – it means you can control a trade with a notional value of £3000 with only £100 of margin.
The minimum level required for maintaining positions is 50%. For example, in the above scenario, once opening the trade you would need to maintain at least £50 of available funds in your account to satisfy the margin requirements. If you fail to satisfy this threshold, we will close all your opening positions beginning with those that are least profitable.
How to calculate margin
Spread bet EURUSD example:
You place a £1 per pip spread bet on EURUSD, trading at 1.10000
Margin required is 3.33% (leverage 30:1)
Your exposure is £1 x £11,000 = £11,000
Initial margin to open the position is 3.33% of £11,000 = £366.30
CFD EURUSD Example:
EUR/USD has an underlying market price of 1.10842, with a sell price of 1.10840, and a buy price of 1.10844. You short the pair – decide to sell EUR – with a trade size of 2 CFDs at 1.10840. The contract is equivalent to one lot of 100,000 of the base currency, which in this pair is the euro. So here selling one contract is the same as trading €100,000 for $110,842, therefore your total position size selling 2 forex CFDs is worth $221,684 (€200,000).
The leverage on major currency pairs such as EURUSD is 30:1 (20:1 on minor pairs). So with this CFD you only need 3.33% of the notional value of the trade, so your margin would be 3.33% of the total exposure of the trade, which is $7,382 (€6,660).
Leverage and Margin
At times, leverage is expressed in percentage terms and referred to as the margin requirement. For example, a leverage of 1:30 is a margin requirement of 3.33%.
The initial margin is a percentage of the full value of a position that you must have as collateral to open the CFD (or spread betting) position.
The required margin refers to the amount you are expected to have at the time of opening a position. This amount includes the cost that will occur due to the spread in addition to the used margin.
The free margin refers to the sum of funds you have available to use as initial margin for new positions. This is calculated by subtracting the margin used for your current positions from your equity.
A margin call occurs if trades move against you and your available funds may not cover margin requirements.
Maintenance margin refers to the minimum equity you need to have in order to keep your positions open. If your equity falls below the minimum equity, the Margin Close out level will be met, and your open positions will start liquidating without receiving notice from us. Default margin close out is set at 50%.
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