Capital investment and risk with CFD

The capital required for CFD trading is generally lower than for conventional share purchases. Traders only have to invest a fraction of the share value via the margin.

Usually, a margin of five percent is traded as standard. However, how high this is depends on the respective underlying asset. If the margin of an account is close to 100 per cent, the position is usually closed automatically.

In this case, the investor's capital may no longer be sufficient to meet the CFD obligations.

Margin call

It can happen that prices develop very negatively. In this case, the broker may ask the trader to increase the margin. This process is called margin call.

If the trader does not fulfil his obligation, the broker can close the corresponding positions by force. This is referred to as "forced closing".
Risk of loss not limited to capital investment

The great risk of CFD trading is that the risk of loss is not limited to the capital invested. This means that the leverage effect of the certificates can also turn negative.

Whereas with a share package there is a total loss in the worst case, the loss with a CFD trade in exness Asia login personal area can go even further. Thus, the trader is liable for his portfolio with his entire assets.

In the worst case, high-risk speculation with CFDs can lead to the trader becoming indebted.

Total capital, margin and free capital

In CFD trading, total capital is the sum of the free capital and the capital blocked by the margin.

Margin is the sum of all security deposits that traders have made. The free capital, on the other hand, is available for further order booking.

It also includes profits or losses that have not yet been realised as well as profits and losses of the current trading day.

Credit financing of a CFD account not recommended

Due to the immense potential returns from the leverage effect of CFDs, investors are tempted to finance the CFD account with loans.

If traders are right with their price predictions, the loans can be repaid quickly. However, since even experienced traders cannot accurately predict price changes, the market price risk with a credit-financed CFD trade is financial ruin.

This market price risk is present at all times due to the high speeds involved in computerised financial trading and can deteriorate rapidly. For example, news from politics or the economy as well as statements by central bankers can lead to completely unexpected price swings that cannot be predicted.