What is Margin in trading?
In this guide, we will go through what margin is in CFD trading. Margin refers to the amount of funds you need to open and maintain a leveraged CFD trade. When you open a trade, the margin amount is blocked from being used in your account. And when the trade is closed, the amount is unblocked.
For example, if you open a position with a $30 margin, the $30 gets blocked in your account throughout the duration of the trade. Once you close the position, the $30 gets released in your account, and the resulting profit or loss from your trade is added to or removed from your account balance.
Margin is a percentage of a contract’s value. This means that when you trade with margin, your buying power is increased as you only need to pay a small part of what the contract actually costs to trade it.
Margin trading example
You can trade a share worth $1,000 by only paying $20. Let’s see how it works.
Share A is worth $1,000 and has a leverage of 1:50.
Margin and leverage are inversely related, so to calculate the margin percentage, divide 1 by 50, which gives you 0.02 or 2%.
To trade Share A, you only need to pay 2% of Share A’s value of $1,000, which is $20.
However, if the deposit’s currency of your account is different from the underlying asset’s currency, you’ll need to convert this amount into your account’s currency to find your specific margin.
At the end of your contract, your profit or loss is based on your contract’s actual value of $1,000.
Margin management in trading
Do remember that when you trade CFDs with margin and leverage, both your potential profits and losses are amplified, depending on whether the market moves in or against your favor. So make use of risk management tools like Stop Loss and Take Profit which help limit potential losses or secure your profit in case the market moves against you. You can learn more about Stop Loss and Take Profit in our free courses on Deriv Academy.
You can trade with margin on major markets with Deriv using our Deriv MT5, Deriv cTrader, and DerivX platforms. Check out our free courses on Deriv Academy to learn more about leverage and trading CFDs or try it out on a practice demo account.
Log in to Deriv Academy using your Deriv account email and password to get started.
Disclaimer:
Trading is risky. Past performance is not indicative of future results. It is recommended to do your own research prior to making any trading decisions.
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