Higher Leverage, More Trading Power
Traders worldwide use CFD because of its leverage feature. Financial leverage in CFD Trading is an investment strategy that allows them to gain exposure to the financial markets with a smaller upfront capital, know as margin. This strategy is also known as margin trading, which allows traders to make their capital work harder for them and achieve a higher return on equity.
Example of Leverage in CFD Trading
Shares of Stock A is currently quoting a price of $3.00 and Jasvind intends to buy 5,000 contracts of Stock A using CFD at the Ask price of $3.00. Assuming Phillip CFD sets the margin for Stock A at 10%, then the initial margin Jasvind puts up will be 10% x $3.00 x 5000 =.
If Jasvind were to buy the same shares of company A using normal stocks on cash market, he would be required to put up $3.00 x 5000 =.
In this situation, Jasvind has leveraged 10 times. This effectively frees up Jasvind’s capital for other investments such as Real Estate, Futures, FX trading, ETFs, Unit Trusts, Insurance, and so on.
However, trading on leverage is a double-edged sword, as it is possible to lose more than what you put into the investment, which is why prudent risk management practices and using the right trading platform for your trades is very critical.
Basics to CFD Trading