CFD Trading Leverage Example: Barclays
In conventional dealing, you would have to pay your broker the total value of the shares you wish to purchase. Say you wished to purchase 10,000 Barclays shares and the current value of its shares is 160p. You would have to pay the total value of the shares purchased, i.e. £16,000 (10,000 x 160p).
When you trade CFDs, you are trading on leverage, this means that you only have to deposit a small percentage of the total trade value to gain a similar level of exposure to the markets.
For example, if the margin rate for Barclays is 15% of the total trade value, you would need to only deposit an initial £2,400 plus commission to trade the same £16,000 exposure.
This is worked out as (10,000 x 160p x 15%) = £2,400 initial stake.
Our typical share margins range from 4% to 25% on our most popular shares whilst our margins for Indices CFDs such as the UK 100 and Wall Street start at just 0.5%. Our margins for major currency CFDs and commodity CFDs start from just 1%. Please be aware that some CFD contracts incur a small overnight financing charge. Find out more about our financing and charges.
Example of gains
By only having to deposit a small fraction of the total trade value whilst maintaining a full exposure, you can magnify your gains. In the above leverage example, you only need to make an initial deposit of £2,400 plus commission whilst maintaining a total exposure of £16,000. Were Barclays' share price to rally 10% in your favour, you would net a profit of £1,600. This represents a return on investment of 67% even though the share price has only moved 10%.
Magnifying your losses
As with all forms of financial trading, there is the potential to lose all or part of your investment. The key risk with leverage is that it can magnify your losses in exactly the same way as your gains. If the Barclays share price had moved against you falling to a new price of 144p, your position would now be worth £14,400 resulting in a £1600 net loss. This represents a return on investment of -67% as the share price has dropped 10%. 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.