Margin trading

Trading on a margin simply means that you can gain amplified exposure to an underlying asset for a given cost. This is because you only pay a deposit which can be anything up to 1/50th of the total value of the position you execute. The ability to gear up your investment enables you to profit on small market movements and over a much shorter horizon – hours, days or weeks, rather than months.

Used defensively, the leverage effect of trading on a margin enables you to gain low cost exposure to an underlying asset in comparison to buying the asset directly. This is particularly useful if you want to reduce your capital at risk on a speculative trade.

Trading on a margin with leverage can magnify the rate of losses as well as the rate of potential returns.

So how does it work in practice? Let's say that oil is trading at $50 a barrel and you believe that price will fall. To profit from a falling market you would open a 'market sell' CFD on oil. If you wanted a £5,000 CFD position, you would typically trade on a margin of 5% of the total CFD value. In this case, you would only need £250 in your account to complete this trade.

Scenario 1. As you expected, the price of crude oil falls. It falls to $47 a barrel. You are unsure about what will happen next and decide to close the CFD to take your profit. The price of oil has fallen 6%. This means that you would make 6% on the total value of the CFD which would be £300, minus costs.:

6% x £5,000 = £300 profit, minus costs.

Scenario 2. Contrary to your expectations, the price of crude oil rises to USD 51 a barrel, a 2% rise. You decide to cut your losses and close the CFD. Your total loss would be £100 plus costs:

2% x £5,000 = £100 loss

Unlike Covered Warrants, CFDs have no fixed issue or maturity dates so you can open or close a CFD position 24 hours a day, 7 days a week through marketindex.

Margin trading allows you to leverage your account balance by trading positions of greater value than you hold on deposit. You decide what fraction of the price you are prepared to put down as invested capital. This is called the 'margin'. Higher margins create a more conservative investment with lower leverage, Whereas lower margins create higher leverage for more aggressive investing.

If you believe that a particular market is going to rise, you can go long (buy). If your prediction is correct, you can sell your position at a higher price, making a profit. If you are wrong, you incur a loss by selling the position at a lower price.

If, on the other hand, you think a particular market is going to fall, you can go short (sell). If your prediction is correct, you can buy back the position at a lower price, making a profit. If you are wrong, you will incur a loss as price has risen.

Open a sub account to hold opposing positions, set a different leverage level, or change currency to JPY, USD, EUR or CHF to manage your exchange rate risk.

Added safety – marketindex has an automatic "Airbag" feature which will close-out all open positions in your account if the net asset value (the balance plus or minus any unrealised profits or losses) falls below 50% of the total margin required to maintain all your open positions. An Airbag only applies to one trading account. Other accounts are not affected if an Airbag is activated on one of your accounts.

You must maintain the necessary margin requirement for all open positions recorded on each trading account.

Calculation of margin required: M = (SxPo) x C/L