CFD Margin requirements
An initial margin amount is needed to open a CFD position, either long or short. There are two varieties of margins which are applied to the total value of a CFD position. These are initial margin and variation margin.

Initial Margin
Initial Margin is the initial deposit required to open a position. For Australian equity CFDs, this ranges from between 5% to 50% of the whole notional value of the trade. Therefore, if you purchased 10,000 XYZ CFDs at $1.35, you would be required to have at least $1,350 within your account to cover the minimum margin prerequisite (10% of your total position size of $13,500). The margin prerequisite for index and foreign exchange CFDs can even be as low as 1%.

Variation Margin
Variation Margin relates to the difference between the initial margin and the margin needed to hold the position open as the position value changes. For example if you buy 2,000 XYZ CFDs, at $5.60 it would give you a position value of 2,000 x $5.60 = $11,200. Assuming XYZ is margined at 10% you would want no less than $1,120 initial margin to open this position. If XYZ goes down to say, $5.40, you would now have a loss of $400 ($0.20 x 2,000). This loss (known as variation margin) is subtracted from your initial margin of $1,120, leaving a deposit of $720. Since you continue to hold 2,000 XYZ contracts at $5.40 you will have a margin requirement of $1,080 (i.e. 2000 x 5.40 x 10%). There is now a paper loss of $400 and also the initial margin has been reduced to $720. This is $360 lower than the margin required to maintain the position open, which means more margin is needed to top up the account. The shortfall in margin is called a shortage in equity. If you cannot maintain your margin requirement you will not be able to increase your position however you will always be able to reduce or close a position.

Equity Balances
The equity (or balance) of your account will vary based on the cash you have deposited or withdrawn from your account, the profits or losses affecting your account and the size of the positions held. In the course of the trading day your account balance, as well as all open positions, are valued against the current market rate. Consequently your equity balance is continually calculated in-line or marked-to-market with market movements. Your end of day account balance is calculated using the mid-closing rates (or the final traded price). The equity balance is used to evaluate your available margin against current positions, and potential new positions you may need to take. Your cash balance is used to establish if there is a necessity for added margin deposits on your account. Once a Contract for difference trade is opened, variation margin requirement should always be maintained for your open positions. It is your duty to make sure that your account is sufficiently margined always, especially during volatile trading periods. You will only be allowed to buy and sell and maintain open positions on the premise of cleared funds in your account, not on promised funds or funds in transit for that reason you must permit sufficient time for money to clear when depositing cash into your account.

If a position goes into profit, the increase in the equity of your account permits for further positions to be opened.

Shortage in Equity
A shortage in equity occurs when the account balance falls below the specified initial margin. Accounts having a shortage in equity are generally only allowed to scale back open positions, until the equity balance is in excess of the specified deposit. No new positions can be opened until this situation is rectified.

Margin Calls
If the market moves against you and your equity balance falls below your initial margin you normally have the choice of:
i. close a number of of your open position(s), to cut back your initial margin to the specified level; and/or
ii. add more money to your account to maintain the initial margin.
This is the first trigger level for margin, referred to as the ‘Margin Call’, which you need to add additional funds to keep your open positions.

Stop Out Level
You will be in danger that your open positions will generally be closed if you have less than 40% of the required initial margin (i.e. 40% of your position size) however this will vary between CFD providers.

Margin, leverage and risk
Margin as well as the associated leverage can be very useful if you use it correctly. It can also be devastating to the inexperienced trader who has little understanding of the hazards of using leverage and not using a defined risk management plan. There are several ways of using the leverage available by trading Contracts for difference, from the most conservative to the most aggressive. The way you employ leverage will depend on your personal circumstances.

Before trading CFDs be certain to read the Product Disclosure Statement (PDS) your CFD provider issues as this will explain in detail how your Contract for difference broker deals with margin. You should also read this free guide to CFD trading, which explains leverage and margin in detail.

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