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How trading CFDs can multiply your profits

by , 12 May 2015

By trading contracts for difference (CFDs), you have the potential to make a lot more money than if you invested in shares directly.

It all comes down to trading on margin.

So how does this work?

Read on to find out…


Where gearing and the margin come in when you trade CFDs


The money multiplier effect at work when you trade CFDs is gearing. You gain gearing when trading CFDs by trading on margin.

Gearing is responsible for multiplying your gains. And gearing is also responsible for multiplying your losses when a trade doesn’t go your way.

By trading on margin, you gain exposure to much more than you put down to open a trade. The company or stock broker you trade CFDs through will determine the margin required for each underlying share or index.

Depending on the CFDs you trade, the margin required will range from around 9% to 25%.


An example of gearing and the margin at work with a CFD trade


To see how this works when you trade CFDs, let’s take a look at an example…

Say the margin requirement to trade Company ABC CFDs was 10%. This means you have to put down a deposit of 10% of your total exposure.

If Company ABC was trading at R100 a share and you want to trade 100 CFDs, you’d have to put down a margin amount of R1,000 ((R100 x 100)/10%).

On the other hand, if you bought 100 Company ABC shares through your stock broker, it would cost you R10,000.


The risks involved with trading CFDs


It’s the gearing aspect of CFDs that makes them higher risk than buying the underlying share.

Using our example above, each movement the underlying share makes means you gain or lose 10 times that.

If you buy CFDs (go long), you’ll make a profit if the underlying share rises in price. If the share price falls, you’ll lose money.

If you sell CFDs (go short), you’ll make a profit if the underlying share falls in price. If the share price rises, you’ll lose money.

So there you have it. How trading CFDs can multiply your profits.

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How trading CFDs can multiply your profits
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