What is Leverage?

  • One of the main advantages of CFD trading, as compared with conventional types of trading, is that you can gain the same amount of market exposure by depositing just a small fraction of the total value of your trade. 

    For instance, say you wanted to buy 1,000 City Developments shares and the current value of its shares is $9.95. With conventional dealing, you would have to pay the total value of the shares purchased, i.e. $9,950 (1,000 x $9.95).

    Leverage example

    With CFD trading however, you would only have to deposit a small percentage of the total trade value whilst being able to maintain the same level of exposure. Our typical share margins range from 10% to 20% on our most popular shares, meaning that if we charge a margin rate of 10% for City Development shares, you would only have to deposit 10% of the total trade value, i.e $995 (1,000 x $9.95 x 10%) plus commission to get the same $9,950 exposure to City Development shares.

    Our margins for indices CFDs such as the Singapore Index, UK 100 and Wall Street start at just 5%, while our margins for major currency CFDs start from just 2%. Please be aware that some CFD contracts incur a small overnight financing charge. Find out more about our financing and charges.

    Magnified gains and losses

    Leverage is great news if the market moves in the direction that you expect. Were City Development’s share price to rally 10% in your favour, you would net a profit of $995. This represents a return on investment of 100% even though the share price has only moved 10%. But it carries a high degree of risk if the market moves against you.

    As with all forms of financial trading, there is the potential to lose part or all of your investment if you do not manage your risk efficiently. The key risk with leverage is that it can magnify your losses in exactly the same way as your gains. Were City Development’s share price to go against you, your net loss could be more than your initial deposit. However, your City Index CFD trading account includes a range of risk management tools to help you manage your risk. Find out more about CFD trading risks.
     

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