Did you know the margins on CFDs can be changed by your provider? for example in May 2006 We received notification that a couple of the CFD providers had reduced the margin levels that apply to some of the mid-cap resource stocks. The reason given was the volatility in the market. The 15% intra-day movement experienced by Zinifex on the 22nd May 2006 demonstrated that a 20% margin can expose you to a potential 300% loss (assuming you had no stop-loss strategy in place) - the flip side for a CFD trader is that, of course, if you had picked the short you would have potentially had a 300% gain.
What the CFD providers chose to do by lessening the margin offered on the CFD was to try and offset the volatility. With at least one of the CFD providers this not only applied to new positions, but also all
existing open CFD trade positions, therefore money (extra margin) may have had to have been deposited into your account immediately to avoid a margin call.
"Will you have to raid your Piggy Bank"
For example;
Your CFD trading portfolio may consist of BHP, Zinifex, Oxiana, RIO, CBA, Coles Myer, ABC Learning and AMP, and although it is running at a loss you believe that there is some upside to be seen on the resources side. As the CFD trader is not in breach of their margin requirements, they choose to pay the interest in lieu of closing the positions. The immediate lessening of the margin level on Zinifex and Oxiana will force the CFD trader to re-evaluate their position as it may push them into a margin call. For the CFD trader who has no reserve cash in their CFD trading bank for such emergencies, they will be forced to close positions to satisfy the margin and therefore realising the losses in their trading bank.
This type of change is commonplace and is within the CFD providers terms and conditions, however, what is different is that some other CFD providers may give a couple of days notice for those who have existing CFD trade positions instead of applying the change immediately. This gives us another example of why it is important to know what your CFD provider is allowed to do (as contained in the FSG and terms and conditions) and what it is
likely to do -
if in doubt call and ask them!. You will find that most CFD providers should honour a verbal commitment given to a direct question. It also gives incentive for you to constantly re-evaluate your portfolio with regard to your margin levels and the balance of your stocks.
In determining the amount to place on each CFD trade, we suggest maintaining a constant dollar value exposure on the underlying position. This means that whatever the collateral level, your trading results are all equally weighted towards the movement of the underlying stock. This eliminates the risk of one ‘bad’ highly leveraged CFD trade eliminating more than one ‘good’ lower leveraged CFD trade.
Example: Assuming you wanted to trade (borrow) $10,000 of CFDs, then;
| Collateral |
Amount required ($) |
| 5% (20:1 leverage) |
$500 |
| 10% (10:1 leverage) |
$1,000 |
| 15% (6.6:1 leverage) |
$1,500 |
| 17.5% (5.7:1 leverage) |
$1,750 |