One of the advantages of CFD trading is that of not having to put up as collateral the full notional value of the CFD. This means that a given amount of capital can control a larger position, which amplifies the potential for profit. At the same time, you stand to lose a substantial part of the margin money in the event of a downturn in a volatile CFD.
A CFD provider allows you to create long or short positions in any CFD. There are normally two types of margin requirements: Initial Margin and Variation or ongoing margins.
Initial margin is the amount you are required to maintain in your account for as long as the position is open. This may vary from 3 to 30 percent on shares and commodities and 0.5 to 1 percent on indices and foreign exchange. Initial margin is fixed on the basis of the underlying reference instrument of each CFD and the perceived risk in the underlying market.
Variation margins or margin on ongoing basis is applied to CFD positions if they move against you. If you were to buy 1000 shares using a CFD at 1 dollar and the price dropped to 90 cents, the CFD provider with deduct 100 dollars as ongoing margin. On the other hand, if the price were to group by 10 cents, your account will be credited by the same amount as running profit. Ongoing margin is also known as ‘marked to market’ as it is deducted or paid in your CFD account on real time basis.
On the other hand, the initial margin is deducted from your account when you open a CFD position and is replaced only after you close the position.
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