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What is the definition of leverage in CFD trading?
When you are trading contracts for difference (CFDs), you hold a leveraged position. This means you only put down a part of the value of your trade and borrow the remainder from your broker. Leveraged trading is also referred to as trading on margin. A 10% margin means that you have to deposit only 10% of the value of the trade you want to open. The rest is covered by your CFD provider. Let’s see how it works. For example, let’s assume one stock of Apple currently costs 10 USD. You think the price will go up and buy 100 CFDs on Apple stock. The broker you are trading with has a set margin rate of 10%. It means you only need to pay 10% of the total value of the trade to open it – this is your position margin. Here is how it’s calculated: 10 USD × 100 CFDs = 1,000 USD Total trade value = the price of 1 CFD × the number of CFDs you are buying 10% × $1,000 = $100 Position margin = margin rate × total trade value If your prediction is correct and the price of one Apple stock moves up to 15 USD, the new total value of your trade will be: 100 CFDs × 15 USD = 1,500 USD You may decide to close your trade at this point and take your profit. In this case, your initial trade amount was only 100 USD, but your profit will be: 1,500 USD – 1,000 USD = 500 USD However, keep in mind that if your prediction is incorrect and the Apple stock price drops to 5 USD, your loss will also be 500 USD, which is also more than your initial stake.