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Leverage effect with CFD trading of shares, indices and commodities

Leverage is when an investor borrows money from a brokerage firm and is able to increase his/her buying power.

The broker won't allow you to withdraw this money, it can only be used to trade.

This is why trading with CFDs and forex is possible for small investors.

If you have a 1000 USD and you use a leverage of 10:1, you can trade as if you had 10,000 USD. With a leverage of 20:1 you can move up 20,000 USD and so on.

How much leverage you will use depends on the broker you chose and how comfortable you are with risk.

Every time you open a position, the broker requires you to leave a percentage of your equity, this is called "margin". It varies from broker to broker.

Never use the maximum amount of leverage, it is a double-edged sword, it can boost your profits but your losses as well.

Thanks to CFDs (Contract for Difference) you trade with a limited investment but with a significant amount in shares, indices and raw materials.

This can be done on the platforms of a lot of brokers, like for example Plus500, Markets or IG.

CFDs are similar to other leveraging products, like options, but work in a very simple way. Unlike regular options, they don't expire and don't lose value as time passes.

For example: you want to buy 10 Google (Alphabet) shares at 750.00 dollars each. The total amount you would normally pay is: 10 x 750.00 = 7,500 dollars.

When trading with CFDs the initial margin for 10 Google shares on the Plus500 platform is only 10%: 750 dollars.

With an investment of only 750 dollars, you take a position of 10 Google shares. But, you still enjoy the full increase of these 10 shares!

A CFD is a "contract for difference". This means that if Google increases to 800 dollars and you sell these CFDs, you make a 50 x 10 = 500 dollar profit.

The advantages of CFD trading

  • Potential large profits with a limited investment, thanks to the leverage effect
  • Making money by speculating on rising and falling markets
  • You choose your own stop-loss and the risk you want to take
  • In the UK, you pay no stamp duty on CFD transactions on shares
  • You can never lose more than the deposit on your account (for Plus500 and Markets )
  • Mostly no commissions: the broker makes money on the spread between the bid and ask

Practical example on the Plus500 Web platform: short S&P500

If you think that the S&P500 price is going to fall, then you go short on the index by pressing the "Short" button.

SP

You go short at around 1914.75 points and choose 10 contracts. The total exposure amounts to 19,148 dollars, but you only need a margin of 65 dollars to open this position. You choose a stop point, to make a profit (1900) and a stop loss, to ensure that this position does not turn on you (1922 points), right away.

SP

The position appears in the overview immediately after opening and you see right away how much is your loss or profit.

Open an account

Compare the CFD platforms and try the free demos or open an account right away.

With an account, you can trade CFDs on shares, indices, commodities (oil, gold, silver, platinum, etc.) and on the Forex market (currencies).

With the free demo, you can practice with a fictitious capital so that you learn how to trade with CFDs and familiarize yourself with the platform from the brokers we selected.