Your capital is at risk
February 12, 2016
CFDs are leverage products that offer you the possibility of trading with more money than your initial investment. The money that you have to put in personally is called margin.
In trading, you regularly hear the terms margin and margin call. That's why we would like to explain their exact meaning.
If you trade with CFDs, then you become the owner of the underlying shares. The CFD broker will buy shares upon your request and you must only finance a very small part. The money you invest personally is called margin.
Look at the example below of the Plus500 platform. You want to buy 200 Apple shares at 96.21 dollars. Normally, a similar investment would cost you 19,242 dollars. If you choose a CFD, you must only invest 1,924 dollars (the margin) to have an exposure of 19,242 dollars.
Trade wisely! Because of the leverage you can take gigantic positions, which however are not appropriate for the size of your wallet. Set a stop exchange so that you know what amount you risk at the most.
You get a margin call when your account does no longer have enough funds to keep the existing positions open.
Let's start from the above example again. Imagine you deposited 2,000 dollars on your account and opened the above position with it. If Apple starts 10% lower tomorrow, then the value of the total investment decreases to 17,317.8 dollars. With CFDs the difference is completely on you. For the above position you would look at a loss of 1,924.20 dollars, because of which your account would basically only have 75.80 dollars. This margin is insufficient to keep the position open. In this case you get a margin call: the broker will ask you to deposit extra funds on your account.
With Plus500, positions are closed automatically so that your account cannot drop below zero. With many other brokers this does not happen and consequently your account can drop below zero. In which case you own your broker money. Therefore, you should preferably protect your open positions with a guaranteed stop!
Stops, Risks, Margin call, Margin, Leverage.
CFDs are a leveraged product. Make sure you understand all the risks involved.
