How do I trade a CFD?

To make a trade, you simply decide whether you want to buy or sell the instrument, click ‘buy’ or ‘sell’ on the trade ticket, and as long as you have sufficient margin in your account, the trade should be executed immediately (see more on margin below).

Margin requirement

For each of your open CFD positions (trades), Spread Co will require you to dedicate trading resources equal to a percentage of the position size. This funding is called a margin requirement.

Because you do not have to pay the full amount of your position size, CFDs enable you to increase the amount of exposure to an instrument through leverage. This means you can trade a larger position than if you simply traded with the funds held in your account. Leverage has the effect of magnifying the profits or losses on your trading capital. The maximum amount of leverage available to you varies with the instrument you are trading.

Margin rates and position size

The margin requirement for a position depends on two variables:

• The Margin Rate - Margin rates vary by instrument and are always expressed as a percentage, e.g; Microsoft (MSFT) CFDs is 5%.
• The Position Size - The Position size = contract price x number of contracts

Calculating margin requirements

The margin requirement for a position is calculated by multiplying the relevant CFD position size by the applicable margin rate:

Margin requirement = (position size) x (margin rate) - If the margin rate for MSFT is 5% and you buy 100 MSFT at $30.00, then the position size is $3,000 and the margin requirement ($3,000 x 5%) is $150.

Margin requirements fluctuate

Margin requirements fluctuate along with position size. As the price of the Microsoft (MSFT) CFD rises from $30.00 to $35.00, the position size rises from $3,000 to $3,500 and the margin requirement simultaneously rises from $150 to $175. Likewise, as the price of the Microsoft (MSFT) CFD falls to $20.00, the position size falls to $2,000 and the margin requirement simultaneously falls to $100.

Account valuation

Your account valuation is the approximate value of your account if you were to close and match all of your positions and withdraw all of your funds.

Account valuation = cash balance + open P&L + (closed P&L or unmatched P&L)

Trading resources

Your trading resources are those financial resources that you have not used for filling margin requirements. Your trading resources are what you can use to post margin for new positions.

Trading resources = account valuation - margin requirements

Margin call

If the amount in your account at any one time is lower than the amount of margin required for all your open positions at such time, Spread Co may issue a margin call. A margin call may be delivered via email or telephone and is a request for you to either top up your account with additional cash (this raises your account valuation) or close part or all of your open position(s) (this lowers your margin requirements).

Margin calls are intended to let you know that you have insufficient funds to support your open positions and that, in order to support the positions, you need to introduce more funds or reduce the positions so that you have sufficient margin.

Liquidation is the forced closure or reduction of your open positions. Liquidation occurs when your resources fall significantly below the level required to maintain your margin requirements.