Margin in CFD Trading

In online CFD trading, the concepts of  initial margin and maintenance margin  are very important. In fact, these constitute the  required margin  , or  the amount that is actually invested  when a position is opened.

To better understand the content of this lesson, we recommend that you go to the trading platform to see for yourself what we will talk about. You can do this by  logging into the trading platform here for free .

Required margin

The  required margin  in CFD trading is the amount of capital that is actually  required from the trader to open a position  .

For example, if the leverage is 1:30 and you want to trade a value of € 1,000, the required margin will be € 33.33.

Then the required margin is calculated with this formula:

nominal capital (value on which it operates) / financial leverage

Please note that  the required margin consists of two parts  :

  • Initial margin
  • Maintenance margin.

We are going to discover them in detail below.

Initial margin

The  initial margin  is the part of the margin that is affected by price changes and that also produces profits and losses.

For some brokers, the initial margin is half the required margin. So, for example, if the required margin is € 50, this share will include € 25 of initial margin. The other half is frozen as a maintenance allowance, which we discuss below.

Maintenance margin

Unlike the initial margin,  the maintenance margin is  used to maintain an open position for the next trading day. During the week, one margin share must be counted, while on the weekend three actions must be counted (maintenance on Saturday, Sunday and Monday).

The maintenance margin is important because in order to maintain an open position, you need to ensure that  the capital  (that is, the capital) is  a certain percentage  above the level of the maintenance margin.

The maintenance margin level requirements are different and specific for each financial instrument, therefore, a different maintenance margin can be applied to each selected instrument (which you can consult in the “details” section).

The maintenance margin is always monitored in real time and once this required margin exceeds a certain percentage, a warning will be sent (for example, an email or a text message) or a  margin call  .

Call margin

We have just seen that if the  maintenance margin  exceeds a certain percentage of the  capital  , the broker would send an email or an alert.

This will be called Margin Call (or Margin Call). This will be used to request the restoration of the level of equity or to warn of a liquidation in order to balance the situation.

Margin call example

Now let’s look together at an example of how a margin call option can be implemented.

Take the case in which the registration has been made and 500 euros have been deposited.

  • Available balance: € 500
  • Equity: € 500 (balance + income statement of open positions)
  • Maintenance margin: € 0
  • P / L: 0 €

Suppose that at 4:30 p.m. we open a buy position on Amazon shares (CFD), quoted at € 2,000.

Therefore, the nominal capital is € 2,000. Since the leverage is 1/5, the required margin will be € 400 (equal to € 2,000 / 20)

The required margin will be composed as follows:

  • 50% initial margin: € 200
  • 50% maintenance margin € 200

We take into account the value of the maintenance margin (which in this case is € 200) because if the capital gets too close to € 200, the margin call would be activated. In this case, in case of no response and continuation of the loss condition,  the broker will liquidate the open positions.

Here is the initial condition immediately after purchase:

  • Available balance: € 100 – spread (deducted when opening the position)
  • Equity: € 500 -spread = (available balance + margins – spread)
  • Maintenance margin: € 200
  • P / L: 0 – spread (the position in the first moment without profit or loss, but with the deduction of the spread)

5.15pm: Suppose Amazon shares fall to € 1,950

  • Available balance: € 50 – spread. We calculate this as follows: (initial capital of € 500) – (maintenance margin of € 200) – (initial margin of € 200 – € 50 or 2.5% loss on € 2000 – spread). So € 50 – spread.
  • Variable income: (€ 450 – spread). How we calculate it: Available balance € 50 + maintenance margin € 200 + initial margin € 200 – spread.
  • Maintenance margin: € 200
  • P / L: – 50 € – spread

As you can see, equity tells you how much you own considering profit / loss and margins.

Now suppose the price keeps falling. If the principal falls below the maintenance margin, a margin call will be made.

After the margin call, you can:

  • Leave the position open and see what happens (the broker could close it if it continues to fall. Or, on the contrary, it could retrace its steps and thus recover)
  • Add capital
  • Close the position yourself

All of these mechanisms are more easily understood with practice. For this, we recommend practicing for free and without risk with the eToro platform.

Go to the next lesson: Stop Loss, how to stop losses automatically

CFD Margin FAQs

What is the required margin?

It is the amount that must be invested in a given trade when trading CFDs. The required margin is made up of the initial margin and the maintenance margin. What is the initial margin?

The initial margin is the part of the margin on which the profits and losses of the CFD trade are calculated. What is the maintenance margin?

It is the margin fee that the broker blocks to keep the position open and that is returned when the position is closed. What is the margin call?

The margin call is a warning that the broker makes to warn the trader of a losing position that has exceeded a certain level of protection. This level is established as a percentage of equity. Do you prefer to copy the TOP Traders?

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