Learn about CFDs

1. Getting Started
2. Trading Stocks on Margin
3. Basic CFD Trade Mechanisms
4. A Closer Look at CFD Trade Orders
5. The Mechanics of a Market Maker CFD Trade
6. The Mechanics of an Exchange Routed Trade

Trading Stocks on Margin

For intra-day stock trading, CFDs offer clear advantages over traditional stocks, not least margin trading. Leverage investments to magnify small price swings and multiply your profits.

Leveraging your Investment

The greatest advantage of margin trading is the ability to leverage relatively small investments for a much greater market effect. This is particularly attractive to short-term, intra-day investing where price swings are typically more limited than over longer periods. The amount you can leverage your investment depends on the trading provider; Keytrade Pro currently allows a maximum leverage of up to:

• 10 times for stock CFDs – on the 22 stock exchanges we currently support
  For example, an investment of only USD 2,000 can be used to command the equivalent position of up to USD 20,000 worth of stocks on the market.
• 20 times for stock index CFDs – for the 11 major indices we support
  For example, an investment of only USD 10,000 can be used to command a stock index position of up to USD 200,000 on the market.

How Margin Trading Works

When trading CFDs, you deposit an amount with the bank which allows you to open and close stock positions for many times the value of your deposit. The amount you deposit is known as the "margin collateral".

When you open a trade position, this collateral is in effect untouched until you close the position again when the profit or loss is credited or debited to your account. In other words, this collateral is there to cover potential losses from your margin trading activities.

When you open a trade position, a percentage of your collateral is required to cover the position, and this amount is reserved in your account. The amount of collateral required to cover a position changes whenever the market price of the position changes. So if you already have open margin positions, the margin available for new positions is continually changing.

Margin Calls

Margin trading can work against you as well as for you, and under normal circumstances your account will not be allowed to go into debt. If the price of an instrument goes far enough against your position and your margin collateral is becoming insufficient to cover the resulting loss, you will be required to close or reduce positions, or to deposit more margin collateral to cover the new margin requirements. If you fail to take appropriate action, positions may be automatically closed on your behalf.

Margin Calculation Example

In this example we will use a stock CFD with a margin requirement of 10% and you have margin collateral of EUR 100,000 giving you up to EUR 1 Million available to invest on the market.

Say you buy CFDs for EUR 400,000 using 40% (10% * EUR 400,000 / EUR 100,000) of your available margin collateral. At this point, you have up to EUR 600,000 available to invest in other CFD positions.

If the market moves with your investment
If things go well, and the value of stocks in your CFD position go up by 2% and you close the position, you make EUR 8,000.

If the market moves against your investment
If the market value of your CFD position drops to EUR 320,000, your Available Margin drops to EUR 20,000 (EUR 100,000 - the loss (EUR 400,000 - 320,000)) and now only covers 6.25% of your investment (EUR 20,000 * 100 / EUR 320,000) - you have exceeded your margin and must take steps to remedy the situation:

1. Transfer additional funds of at least EUR 12,000 to cover the new margin requirements of EUR 32,000. Note that transferring EUR 12,000 will bring your Available Margin back to 10% of your position (10% of EUR 320,000) but if the CFD position falls further you will immediately have exceeded your margin again.
2. Reduce the CFD position by selling the appropriate number of shares equaling at least EUR 120,000 to bring your position down to EUR 200,000. Again, this will bring your Available Margin back to 10% (on Margin) of your position (10% of EUR 200,000), but if the CFD position falls further you will immediately have exceeded your margin again.

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