This means that for a small deposit, a trader can have access to a significant amount of vacancies, which has the effect of magnifying gains and losses relative to the margin required.

For example, a job in one of the leading British blue-chip companies may require an initial margin of 5%. This simply means that if you were to open a position to the value of £ 10000, your account would require an initial margin of only £ 500.

Gains and losses therefore visit this example will be amplified by twenty times, which can make spectacular profits, but also substantial losses.

The effect of the margin

Contrary to common stock deal, using the margin means that you can lose more than you invest. You do, however, have the opportunity to protect yourself by using stop losses and it is recommended that you set for each of these exchanges.

If you lose more than your initial margin payment in a single day, you would be required to pay the difference to the CFD broker.

If the loss is more gradual you are required to keep the margin completed the minimum required percentage or close some of your positions in order to reduce the margin requirement.

If you fail to make prompt payments margin, some or all of your position can be closed by the CFD and losses broker could again exceed your initial margin.

Earnings on the open positions are credited to your account every day and the losses are deducted, and that amount is called the variation margin.

The costs involved

If you buy a share, or another base index, which is also known as "opening a long position" or "going long", you will actually borrow money from the bank for the period Trade is open. Therefore, you have to pay interest until the position is closed.

If you sell ( "the opening of a short position" or "go short"), with the intention to buy later, you will consequently interest until the position is closed. Please note that there is a difference between the interest rates levied on long positions and the percentage of the interest earned on short positions.

In conjunction with the committees of opening and closing of trade, there are no other costs for the opening of a CFD position using the margin.

A real example

In the following example, we show a scholarship traditional approaches to the costs and compare it to the equivalent of trade using the CFD.

Traditional treat: Opening Trade - 5000 HBOS share

Purchase Price - 900p
Cost crude - 45000.00
Timbre - 225.00
Commission@0.5% - 225.00
Net cost - 45450.00

Closure of commerce - Ten days later

Sale price - 920p
Gross - 46000.00
Commission@0.5% - 230.00
The net proceeds - 45770.00
Profit overall and the return on invested capital - 320.00 (0.71%)

CFD DEAL

Cost crude - 45000.00
Commission@0.5% and no stamp duty - 225.00
Net cost - 45225.00
Margin required (5%) - 2261.25

Gross Profit - 46000.00
Commission@0.5% - 230.00
Financing costs (10% pa days@8.5) - 105.32
The net proceeds - 45664.68
Profit overall and the return on invested capital - 439.68 (19.44%)

What happens every night is that the profits or losses accrued at the end of the day, if the position is "market value" are added to or subtracted from the initial margin.

After the position is closed, the initial margin is credited to the client and the gain or loss is simply the sum of the variable margin for the time it was open.

Gains and losses are magnified using CFD. Using the advantages of leverage, a small filing enables large profits to be done - in this example, the return on equity was almost 20% in just two weeks.

Of course, if the price has changed in the opposite direction compared to the loss of the deposit is magnified accordingly, and you can lose more than your original deposit.

The margin required varies in response to price movements of the underlying commodity. At times, you may be required to place funds on deposit, especially in periods when market conditions are highly volatile, as the coverage rate can be raised by the CFD broker.

How to work on the cost of interest on long positions

In this example, a trader buys CFD ( "going long") 10000 Vodafone shares at a price of 170.25p. The total value of this theoretical position is 10000 x 1.7025 = £ 17025.

One night interest would be £ 17025 x 8.5% (prevailing interest rate, plus 3%) divided by 365. This equates to £ 3.96 interest charged each night while the post remains open.

One word of caution

The negotiation of these markets is generally regarded as suitable only for the most experienced in the exercise of investors a high degree of risk than stock purchases.

You should know how much you can lose and potentially honestly assess if you can afford to lose because of the financial resources and your investment objectives.

Changes in exchange rates can also cause your investment to increase or decrease in value and the tax laws may be subject to change, and if in any doubt, please seek further advice.

By : Mike Estrey