CFD stands for Contract For Difference and it is a leverage trading product where retail traders can access leverage products such as Stocks, Forex, and Cryptocurrency through regulated or offshore brokers.
All you need to get started is an initial deposit or margin capital which acts as your collateral money, the rest is handled by your broker.
When you open a position with this type of trading platform you only put down a small fraction of your own money when entering the market. For example, traders with smaller accounts can trade lot sizes of up to several hundred thousand with a deposit of only $500.
The money lent to you is paid back to the broker once the position is closed out, either for a profit or a loss. A tip is to use our CFD calculator to assist you with your calculations.
The added funds you receive to open the trade can not be lost and you don’t have to worry about owing the platform anything if you suffer a loss.
This style of investing is a very powerful tool for traders who lack the funds to generate sufficient and steady profits in the financial markets.
CFD leverage is used by both retail traders and professional traders who are looking to amplify their profits up to 10 or even 100 times. Since you are only asked to add a small amount of capital upfront, you can decrease your overall risk of losing money by using less margin.
Takeaway
You will learn
CFD leverage is the amount of borrowed money you receive from your CFD broker after depositing your margin capital.
This directly translates into morex buying power and bigger position sizes which can result in handsome profits if you predict the market correctly.
Before opening this kind of trade you are asked to choose your ratio, the position size, and of course all the other necessary details such as order type and price.
The platform then calculates your leverage capital and adds the missing money that is needed to open your position.
For example, if you have deposited $1000 in your account and you wish to open a position of $10.000, your margin capital will be 10% of the position size and the rest is the credit that the CFD broker provides you.
Here is an example of how leverage works:
This is a normal case of how to trade the fx markets with added buying power. Your trades will not always end up as successful as Joe’s but if you read the market correctly you can collect windfall profits in a very short period.
This of course comes with some added risk factors and I recommend that you read our guide on risk management with leverage before starting out.
The concept of using borrowed money to amplify profits has been around for a very long time. It’s very popular to leverage long-term investment portfolios for large investment institutions so it only makes sense to offer this style of investing to retail traders as well.
The process of accessing the borrowed capital is completely automatic and you as a trader don’t have to worry about where the money comes from or how it reaches your account.
This is done behind closed doors through liquidity providers that your trading platform is contracted with.
In a nutshell, here is how CFD works:
Not all platforms will let you choose how much added buying power you want to use and in this case, you need to control your risk with your position size.
For example, if you deposit $1000 and you have access to up to $100.000 of trading capital, this means that your broker is giving you a ratio of 100x margin.
This might be too much for a complete beginner and in this case, simply reduce the position size to make things easier. Once you find your sweet spot you will find that it’s a joy to trade with borrowed funds if you keep your risk under control. It’s all about letting your winners run and cutting your losses very fast.
Do you have to pay back leverage when you lose?
No, the leverage is automatically returned to your broker, and the losses are deducted from your margin capital.
This is a very good question that many traders and investors are asking, is it really necessary to use leverage while trading the financial markets and why is it offered in the first place?
The reason why brokers offer leverage to beginners is of course to make more money but also because these operators offer short-selling with leverage, more markets, and can enable smaller traders.
This is a question that so many traders are asking and I understand why this is interesting. Some companies offer up to 5000x leverage in their fx trading pairs. To me, this is outright crazy but some traders out there want to take the bull by the horns and ride out the market in a wild fashion.
Through regulated and reputable CFD brokers, borrowed funds is offered from 10x, 20x, 50x, 100x, and up to 500x.
A ratio of 1:500 is an extreme ratio and I don’t think beginners should start at this level when they are entering the market for the first time.
A good leverage for a beginner is around 1:5 to 1:30 depending on the market and the time frame of your strategy.
It’s crucial to learn how to choose forex leverage if you are a beginner to avoid over-leveraging and wiping out your account.
Below is a table of a couple of popular CFD platforms and the margin they offer:
| Broker | Leverage ratio |
| BDSwiss | 1:500 |
| Eightcap | 1:500 |
| Skilling | 1:500 |
| Avatrade | 1:400 |
| Pepperstone | 1:500 |
| FxPro | 1:200 |
| IC Markets | 1:500 |
| HYCM | 1:500 |
| Vantage FX | 1:500 |
These are all globally regulated and trusted brands and they all offer ratios of several hundred. Many of the platforms only offer the maximum amount of leverage to professional clients.
These are clients who can prove that they have sufficient funds and education in trading the financial markets. If you apply for a professional account you can take advantage of extreme credit trading in forex, stocks, and crypto.
Before testing this out I recommend that you demo trade on a broker that offers a demo account to test out which ratio is best suited for you. If you are not careful enough and jump on the most extreme ratios straight off you risk liquidation which will cause you to lose all your funds.
The more leverage you take on the closer you get to your liquidation price, hence the increased risk. Use our liquidation price calculator to find out a safe level.
Most brokers nowadays offer negative balance protection which will protect your funds from ever going negative. This will prevent you from going into debt with your provider.
CFD trading is outright banned in the United States while still being operative in many other countries.
Now, is leverage trading legal in the US at all or are all types banned?
Forex, crypto, and stock trading on margin remain legal in the US as long as the broker that offers leveraged services is approved by the NFA.
Traders use borrowed funds for many reasons but some factors make it worth the hassle. I have listed below the biggest benefits that I can think of and if you agree with these points you might as well try it out.
CFD stands for Contracts For Difference and is the contract offered by the broker. Leverage is the multiple of added buying power to your positions based on your margin capital.
Yes, they do. However, they are very selective in their trades and they don’t blindly enter the market. Due to the volatility and their trade size, they choose their entries with precision and exit the market at the slightest sign of weakness in the market.
This guide has been a tutorial on CFD leverage as well as an explanation of how the trading part works. As you read this article you will gain an understanding of how the platforms work, how they operate, where the credit line comes from, and also the biggest benefits.
You will also learn what ratios are available on the different platforms and also some general tips to take away before you start.
There are many reasons why you would want to leverage trade CFDs and some of the most important reasons are outlined in this guide.
As a beginner, I recommend that you read this tutorial in full to learn the basics before you enter the leveraged markets.
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