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CFD Leverage and Margin

CFD Leverage and Margin

Ein typischer CFD-Trader verfügt nicht über das Kapital oder die Absicht, in eine herkömmliche Aktie zu investieren. Er möchte aber dennoch von den Preisänderungen des Vermögenswerts profitieren. Die Lösung ist, sich vom CFD-Anbieter Geld zu leihen, um den Handel einzugehen. Die Hebelwirkung bei CFD besteht im Wesentlichen darin, dass man sich Geld leiht.

First Published date: 8. March, 2022
Last Updated: 15. March, 2023
Fact-checked by Adrian Müller

CFDs (Contract For Differences) are popular with traders desiring the same market exposure as traditional investors but want to invest less capital. You can make the same profit on a stock as you could have from owning it. However, your profit percentage remains significantly higher than a traditional investor as your capital is small.

The CFD trader’s ability to leverage and the low-margin percentage make this possible. But if you aren’t careful, these perks can work against you and cost you all your capital. So, before getting into CFD trading, you must properly understand leverage and margin. Find more in the following discussion.

Table of Content

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An Overview Of CFD Trading

You shall learn all about CFD leverage and margin shortly. But first, you should review the basics of CFD trading.

CFD is short for Contract For Difference. It means you enter a contract with your provider (broker) to trade on the difference in the price movement of an underlying asset. This asset can be a stock, currency, gold, or something else.

The appeal of a CFD lies in the fact that you don’t have to own the asset. Hence you can avoid the liabilities that come with it, such as a big investment, paying taxes, and absorbing huge losses when the asset price falls.

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79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% 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.

How Do CFDs Work?

In a CFD trade, you speculate on the price movement of an asset. You then enter a position based on your predictions. If you believe it will increase in price, you enter a long position. On the other hand, when your financial senses tell you the asset shall fall, you enter a short position.

Your CFD provider will close the position with a reverse trade. This means your provider will close the position with a ‘sell’ if you entered a long position (and vice versa). The difference between the two trades (opening and closing) is the net profit or loss.

CFD trading is legal in Australia, the United Kingdom, Singapore, South Africa, Thailand, and others.

However, the US deems CFD trading illegal. Because being an over-the-counter product, CFD clashes with the states’ regulated exchange rules. So, the Security Exchange Commission doesn’t allow US citizens to enter CFD positions.

Trading beginner - Plus500 -white

Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Why Do People Trade CFDs?

There is a significant amount of risk involved in CFD trading. Otherwise, why would the US protect its citizens from it? But still, this form of trading is hugely popular with short-term investors. People enjoy how similar CFD is to betting. Not to mention, you can make huge gains on relatively small investments.

Also, CFD trading allows you to diversify and balance your investing portfolio. You might not have all the money to invest individually in currencies, stocks, and commodities – CFD provides a solution. You don’t have to invest in any of them. But you still benefit from the price movements in the same way as someone owning the assets would do.

Meanwhile, you can counter some of the losses of a falling asset price by using CFDs. Suppose you own a stock X Company. When the stock’s price starts to fall, you enter a short position with a CFD of that company and balance the temporary losses in your portfolio.

Besides, the transaction costs involved with a CFD are much lower than traditional investments. Nowadays, traders can access various technical tools, platforms, and software. This means you can easily automate your CFD trades after you gain sufficient experience.

What Are CFD Leverage and Margin?

Leverage is one of the main reasons why CFD trading can be so profitable. The trader controls a large position with a comparatively smaller amount of capital. This smaller amount is the margin. Although leverage promises massive gains, it can also make you lose everything if you aren’t careful.

Understanding CFD Leverage

A typical CFD trader doesn’t have the capital or intention of investing in a traditional stock. But they still want to profit from the price changes of the asset. The solution is to borrow money from the CFD provider to enter the trade. Leverage in CFD is essentially this borrowing of funds.

The CFD leverages are expressed as ratios. Currently, the range of CFD leverage is typically 30:1 to 2:1. The leverage ratio defines how much of the total capital a CFD trader can control against their smaller investment. The greater the ratio, the more control and potential profits the trader can enjoy.

For instance, suppose you have $1000 in your CFD trading account and are using a 30:1 leverage. This means you can control $30 worth of CFDs for every dollar in your account. Therefore, your $1000 dollar investment will let you control a position valued at $30000. The $29000 that you don’t have has been borrowed from your broker.

Trading beginner - Plus500 -white

Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Understanding CFD Margin

If the broker lends you money for trades, there should be collateral to cover the risks you put the broker in. Therefore, you must make some initial deposit to the CFD account before entering a leveraged position. This deposit is known as the margin.

In other words, the margin is the minimum amount you should have in your account to trade CFDs. Suppose you want to enter a CFD position that is worth $30000. If the trade requires a 3% margin, you must put down $1000 to enter the trade. In volatile markets, the margin percentage tends to be higher.

To keep your position open, your total balance in the CFD account can never fall below the margin. This can cause great stress for the investor when their assets perform opposite to their predictions.

For instance, you had put $1000 in your account to open a long position worth $30000. Suppose the price of the assets starts falling, and your position comes to -$100. This means your margin has been reduced to $900.

To the broker, the reduction in margin means you will not be able to compensate for the losses when your position closes. So, they would notify you with a “Margin Call.” They tell you to replenish your account to bring it up to $1000. A maintenance margin might be higher than the initial deposit in some arrangements.

If you fail to respond to the margin call and bring up your margin to their requirement, the broker will close the trade before the set point. This means you will suffer significant losses.

How Leverage Magnifies Profits and Loss in CFD Trading

CFD trading with leverage is popular among short-term investors because it can easily magnify small capital to huge profits. However, the same mechanism can work against the trader and cause them overwhelming losses. It’s easier to understand with an example.

Suppose company X’s shares are priced at $30. Therefore, a position that holds 100 shares of the company would be $3000. As a trader, you have two options for gaining this position. Firstly, you can traditionally buy the shares. In that case, you must deposit $3000 to your broker account.

On the other hand, you can enter the same $3000 position via CFDs. At a common 10% margin requirement, you will only put down $300 to enter the position. You will leverage the remaining $2700 from the broker.

If X company performs well during that trading session, its share price might rise to $32. When it closes, the $3000 position you entered will be worth $3200. Consequently, you made a profit of $200.

As such, the CFD trader has made a 66% profit against the initial investment. Meanwhile, the traditional investor has made only a 6% profit. However, both held a position of the same value. This is how CFD leverage can magnify your profits.

Similarly, if company X performed contrary to your predictions, you would lose $200. This means the CFD trader suffers from a disastrous 66% loss, leaving him with only $100 (or less due to the deduction of fees and costs). Meanwhile, the traditional investor only faced a 6% loss. That’s how CFD leverage can magnify your losses.

How To Minimize CFD Trading Risks?

As you can see, CFD trading comes with the promise of unbelievable profits and crippling losses. That makes CFD trading sound almost like gambling – but it’s not. Unlike gambling, CFD trading is more scientific and rational. However, you must have the proper education, plan, and strategy to make it that way. Here are some helpful tips to minimize risks in CFD trading.

Have a Trading Plan

You can’t be a professional CFD trader if you don’t have a trading plan. You might have sporadic success out of sheer luck. But you will suffer losses when you least suspect it and instantly see all your capital disappear. Building a trading plan will provide you with small but steady and consistent gains. Plus, you will not frequently suffer losses.

To build a good plan, allocate the number of daily hours you will invest in CFD. You can further divide this time between gaining education and actual trading activity. You should also set realistic trading goals.

Furthermore, be wise with your capital. You don’t want to put everything on the table. That’s true even when you are on a hot streak.

Your trading plan must also include choosing markets and brokers carefully. You should only CFD trade the underlying assets you have adequate understanding and knowledge about. If you want to trade a wide range of assets, educate yourself about them first. Lastly, maintain a journal to track and record your trading activities.

Be True To One Method

One of the major reasons why CFD traders suffer overwhelming losses and go broke is acting out of emotion. The market is always volatile. Plus, it is ridden with rumors and bad advice. A trader can easily give in to the fear or greed of their peers and trade in a way they don’t clearly understand. The consequence of which is usually a disaster.

A strict trading strategy can save you from this. Various CFD trading strategies include scalping, high-frequency trading, hedging, position trading, etc. You should adopt a trading strategy early in your career and stick to it through thick and thin.

Adhering strictly to a strategy will help you find stability in the volatile market. It will also keep you from acting out of emotion. Because when you see that a trading activity doesn’t comply with the strategy you follow, you can avoid participating in it.

It’s also important to review your methods from time to time. Your journal will help you evaluate how well the strategies are working for you. Following proper education and demo practice, you can switch to a better method if you wish to.

Evaluate Your Position

CFDs let you enter a powerful and highly valuable position cheaply. These big positions allure many traders with their promise of immense returns. However, many traders also forget that entering a big position exposes you to serious capital losses.

Therefore, it is essential that you only enter positions where you can afford the losses. Investing a small percentage of their capital in CFDs is the ideal course for beginners. Also, avoid trades that require higher margins because your losses will be too great if your predictions fail.

Apply Stops and Limits

A stop-loss order is an effective way to minimize risks in CFD trading. It essentially means instructing your broker to sell a security if the price comes to a pre-defined level. That way, even if the market moves against your position, your suffered losses shall keep to a minimum.

Suppose you bought a CFD on a stock at $200. You then put a stop-loss order on it at $150. If the market moves in the opposite direction, your broker will automatically sell the position when the price falls to $150. That way, you ensure that your losses in this trade are at most $50.

Do Your Market Analyses

77% of CFD traders lose their money in the market. So, what separates a winning trader from the rest? Well, they can analyze the market better than others.

Traders analyze markets in two ways. The first one is technical analysis. Here, you review the movement of past prices, volumes, chart patterns, and other technical data to identify trends in the market. This helps you make informed and scientific predictions and increase your chances of success.

Besides technical analyses, professional CFD traders also keep up to date on current events. Wars, announcements, pandemics, rumors, and news flashes drive public sentiment and affect the market. The experienced trader can understand the implications of these events and trade accordingly.


CFD trading can be highly profitable if you know what you are doing. But getting to that level of expertise takes time. So, as a beginner, you should start with smaller capital.

Instead of quick money, aim for successful trades and develop a deeper understanding of the market. Our educational materials and vibrant forums can assist you in this journey.

About the author – D. Schmidt

I’m a German stock trader who has lived around the world. I travel extensively and believe that my experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.

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