Today, what we are going to talk about is the ideal margin required when trading various instruments via CFDs or contracts for difference.
Dealing with leverage
With a relatively small initial deposit, you gain a much larger market exposure via CFDs and that means the potential return on your investment is significantly bigger.
We can’t emphasize enough…
You need to understand how to manage your risk. Leverage can magnify not only your profits but the losses as well so if the market moves against you then your position might be closed with a margin call or you’ll need to add more funds into your account to keep an open position.
To put it in perspective, with a 1% margin, a thousand dollars will control $100,000 dollars-worth of that but do remember that you don’t need to trade at such ridiculous levels.
So let’s go through the various products that are available with this form of derivative:
Share CFDs are very huge and most brokerages generally have a starting margins of 5%. However, it can go for as low as 3% on their top 5 to 10 stocks which usually includes companies listed on the ASX.
Depending on the liquidity of the stock and the amount of the available stock, this margin could scale up.
With margins on shares, they start at 5% and may go up to 20% and they generally have a sliding scale. And as a general rule, the lower the liquidity of the stock, the higher the margin that you’ll require upfront.
If you’re interested in trading indices CFDs, the margin is usually at 0.5%.
Among the most popular and volatile indices that you can start with this margin are the following:
The margins required on foreign exchange is generally 0.5% but it can get as low as 0.25%.
For exotic pairs it can go higher from 1 to 2%.
If you’re looking to trade commodities, the margin required is generally 1% across the board although it can get a little bit lower at 0.7% at times.
You only need 1% margin upfront for crude oil and precious metals like gold and silver.
Here’s the deal:
During volatile times, a lot of brokers raise their margins and that can put you in a difficult position because you can might be tempted to tie so much of it up in order to access so much leverage on your account.
So when do these “volatile times” happen?
Though this can be nerve-wracking for investors, fluctuations are actually a normal part of investing.
Oftentimes, market prices tend to react when something unexpected happens and below are some of the most common triggers:
Since governments regulate industries and makes economic decision which can have a huge impact on businesses and knee-jerk reactions among investors.
Here are some of the popular political events that caused an international stir:
- UK’s withdrawal from the European Union or more popularly known as Brexit
- Donald Trump’s victory as president of the United States
- Escalating US-China trade war
Most likely, you’ve heard about one of these reports on TV or via a popular news site. An economic data is basically a statistic that measures economic activity.
Among the leading indicators that can impact market performance are the following:
- Inflation data
- Monthly jobs reports
- Quarterly GDP calculations
- Housing starts data
- Consumer spending
Here’s a tip:
When the economy is doing well and hitting targets, the market prices tend to go up and on the other hand, if specific targets are missed, prices tend to go down.
Good or bad PR can have an effect on the company’s stock market value and depending on how huge the company is, it can also cause other related markets to react.
For example, if a huge company such as Apple, Facebook or Microsoft had a huge drop in it’s stock market value, it could trigger the tech sector and major indexes to follow suit.
Here are some PR’s that can put the company in a positive light and may help in raising their stock market value:
- Earnings report
- New product releases
- Excelent product reviews
On the other hand, here are some announcements that can have a negative effect on market prices:
- Product recalls
- Data breaches
- Bad executive behavior
Economies around the globe are connected that’s why any serious news can have a ripple effect on markets worldwide. Any event that may impact the flow of money and investments can dramatically cause markets to swing and this includes the following:
- Natural disasters
- Political crisis
So how do I keep up with these triggers?
Make sure that you’re subscribed to get emails or newsletters from your broker because these are good sources of information regarding changes in margin.
Popular brokerages like XM also have dedicated news sections which you might find useful for getting the latest market events and previews.
Also, it would be wise to check out economic calendars to find out if there are any upcoming events that could cause market prices to swing.
Another good move is to subscribe to popular financial news websites such as Bloomberg and Investing.com to get the latest updates on events and happenings that can have a significant effect on the financial world.
And there you have it. Hopefully this article paints a picture of the types of margins required on the instruments that you can trade with your CFD service provider.