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MARGIN TRADING
One of the major benefits of trading a CFD is the fact that margin trading is available to the client. Contracts for difference trading means clients can trade a full portfolio of shares without having to tie up large amounts of capital. Margin trading is very similar to normal share dealing. A customer deals at the cash price of the share, and pays a commission which is calculated as a percentage of the value of the transaction. However, the customer does not have to pay for the full value of the shares. Instead he puts up a deposit, the minimum margin trading requirement, which is normally between 10% and 25% (5% for limited risk transactions) of the underlying contract value depending on the type of share and the time zone where the customer is located. As in the example above, a client purchasing $10,000 worth of CFD shares will only be asked for $1000 margin trading amount.
While his position remains open, his account is debited or credited to reflect interest and dividend adjustments. The direction of interest and dividend adjustments depends on whether the customer uses a CFD to create a long or a selling short position. If he has a long position his account is debited to reflect interest adjustments and credited to reflect any dividends. The effect of these adjustments is to mirror the effect of buying shares in the normal way, where he no longer earn interest on the cost of the shares, but receive dividends instead. If the customer has a selling short position, his account is credited with interest adjustments and debited to reflect any dividends. These adjustments mirror the effect of selling shares, where he earn interest on the proceeds of the sale, but cease to receive dividends. The interest rate that the customer pays to go long and the rate that he receives for selling short are set out in his account opening letter.
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