Financial leverage in CFD trading is an investment strategy that allows them to gain exposure to financial markets with less initial capital, known 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 capital. It is an advanced trading strategy used only by experienced traders. With CFDs there is no delivery of physical goods or securities.
A CFD investor never actually owns the underlying asset, but receives income based on the change in the price of that asset. For example, instead of buying or selling physical gold, a trader can simply speculate on whether the price of gold will rise or fall. Spread betting and CFD trading are leveraged products, meaning that only a percentage of capital is needed to open a position and gain exposure to a much larger sum of money in the trade. This means that profits and losses are amplified as they are determined by the total value of the trade.
Find out how to trade with leverage. Leverage allows traders to maximise their potential profits. Traders borrow capital from brokers to make larger trades than they would have been able to make with their own money alone. For example, in forex trading, brokers require traders to open a margin account with them.
CFD trading is a method of trading in which a person enters into a contract with a cfd broker, rather than buying the underlying asset directly. Another market with a relatively low leverage ratio is equity trading, where spread betting and CFD prices are offered on over 9000 international stocks and ETFs within the stock market. Major regulatory bodies, such as the FCA and ESMA, restrict the amount of leverage offered to traders in CFD trading, to protect the interests of investors. You will not be protected by the leverage limits for retail clients under the UK FCA for CFD trading.
Because CFD trading does not involve the actual asset and operates independently of the market, it allows greater flexibility than traditional trading - for example, access to foreign markets, leveraged trading, fractional shares and short selling. The level of leverage offered by the CFD broker magnifies the underlying movement of the stock, which can be either positive or negative. The power of leverage magnifies the gains from small percentage movements of the underlying cfd instrument by increasing exposure to the market. The advantages of cfd trading include lower margin requirements, easy access to global markets, no rules for short or day trading, and little or no commissions.
With eToro, the leading social trading platform, you can connect, share strategies and discuss CFD trading with millions of users. A contract for difference (CFD) is an agreement between an investor and a CFD broker to exchange the difference in value of a financial product (securities or derivatives) between the time of the opening and closing of the contract. Firstly, and most obviously, it is important to have a thorough understanding of all facets of CFDs and the leverage effect they can offer through the margin function, which is two-way; leveraging your trading capital in this way can work in your favour or against you. CFD trading can also be considered risky as a result of other factors such as the poor regulation of the industry, the potential lack of liquidity and the need to maintain adequate margin due to leverage losses.