CFDs and Leverage
CFDs and Leverage
As a form of trading involving leverage, instead of having to put down the cost of the trade in its entirety (at 9611.5 x 5 that would cost £48,057.50, the same as my nominal risk) I only need to put in a small percentage of the overall value to initiate the trade. We work this out as a percentage of the nominal risk – if the margin is 1%, then 48,057.50/100 = 480.575. Therefore, rounding upwards by a penny, £480.58 is the amount needed to initiate the trade.
If, however, I had decided to sell £5 of the DAX instead of buying it, the price of my trade would be as follows;
9610.5 x 5 = £48,052.5
The amount I would need to put into my trade would therefore be 1% of that, meaning £480.53
Traders are advised to remember that increasing leverage increases risk
CFD Trading Results
Going back to the scenario where I bought £5 rather than sold, if the DAX subsequently moves up to a level of 9613.5/9614.5 and I decide that this would be a good point for me to exit the trade, I would work out the profit on my trade as follows;
the amount I bought x the number of points that the trade has moved in my favour.
In this case my profit would therefore be 5 x 2, meaning that I would make a profit of £10 on the trade.
Alternatively, had I sold £5 of the DAX at the 9610.5 level and then closed the trade at that 9613.5/9614.5 level, my loss would be 5 x 4, seeing as the price of my closing trade would be four points higher than when I opened it. In this case, my loss on the trade would be £20.
If however, the DAX fell from 9610.5/9611.5 to 9608.5/9609.5 – had I bought £5 of the DAX at the original level my loss would be calculated as follows; the amount I bought x the number of points that the trade has moved against me.
In this instance my loss would be 5 x 3, meaning that I would make a loss of £15. On the other hand, if I had sold £5 of the DAX at the original level then my profit would be 5 x 1, giving me a profit of £5.