Contract For Difference (CFD) is a trading instrument that allows the use of leverage. Leverage is the utilization of a small portion of the actual amount of the underlying asset to take on full positions in trading. This initial amount paid by the trader is also known as margin. Leverage can be used in trading CFDs, Forex and stocks.
What is Leverage in CFD Trading?
What is leverage? What does it mean to use leverage on CFD trading? Leverage is the amount paid by the trader to be able to establish a huge position in trading. Margin and leverage are closely tied to each other. However, it is important to understand that these two have differences that set them apart. Leverage is the ratio or percentage of the capital being borrowed by the trader to open more positions while margin is the amount that must be paid to start trading with leverage.
Leverage is something that draws the attention of many people. It is the driving point of traders who are trying to benefit from the market. Although it seems quite fascinating to trade with leverage, it is important to see its negative side as viewing it will only prevent unfortunate things from happening. Newbie traders must be very careful when using leverage on their trades. As much as possible, if you have to use leverage, you must use it with precautions, utilize stop loss, and trade according to your trading plan to avoid mistakes along the way. You might also need to lower your trading positions if you are new to the market as this will help prevent wiping out your entire trading account.
How Leverage Trading Works
It is highly advisable for new traders to start trading with leverage that is lower than the maximum amount of the leverage allowance. This will help the trader to keep their positions open at their full size despite having some small losses along the way.
Leveraged trading is more suitable for traders pursuing short-term price movements instead of those who are aiming for a long-term investment.
The Leverage Products
Leveraged products are known as derivative instruments that allow you to use the full amount of the underlying asset after paying a portion of the amount. Two significant leveraged products are Contract for Difference (CFD) and spread betting. When you trade with leverage, the trader can speculate on the underlying asset by paying a reasonable small amount. Technically speaking, the trader doesn’t own the underlying asset but still, the profit and losses will be handed into the trader.
The key difference between trading CFDs and spread betting is that CFD requires you to pay capital gains tax while spread betting exempts you from this tax. In addition to that, CFD traders are also charged with a commission and the spread when they trade shares on CFDs. Losses and profits are calculated by the difference of the underlying asset which is determined at the end of the trading day. As for spread betting, the amount is multiplied by the amount at stake.