Authorised and regulated by the Financial Services Authority

Margin Trading

This is one of the most powerful attractions of CFDs, enabling you to trade an entire portfolio without tying up large amounts of capital.

When you lodge a security deposit of, say just £20,000 (or equivalent currency) in your account, you can trade up to £400,000 worth of shares. This is a leverage factor of 20:1 or, to put it another way, a margin requirement of 5%.

Although the normal margin requirement is 5% for CFDs in FTSE 350 shares, some of the leading shares require only 3% margin. For smaller companies or if a share price is notably volatile, the margin requirement may be set to 10% and above depending on liquidity and market capitalisation.

Margin is a term derived from the futures market, and provides for leveraged trading in financial products. In its most simple format, if you offered the trading of an instrument at 5% margin, you are in fact saying that you need to only deposit 5% of the total purchase cost of that deal to open that position.

CFD Margin Example
You purchase 100 of shares in Company A at £1, but only deposit 3%, or £3 towards this transaction. This is attractive to people who do not want to hold the position for the long term, and provides for leverage when trading. In this case the client has only paid £3, if the stock they purchased goes up 6p the next day, and they sell, they will have made a £5 profit on a £3 investment, or 200% return (less roll-over costs). If they had been cash buyers of the shares they would have made a 6% return. A 3% margin provides a trading leverage of approximately thirty three times the initial deposit or 1:33. Initial Margin for share CFD’s is calculated on a percentage basis.

Initial Margin
Initial Margin is the initial deposit required to open a position on an instrument with us once you have opened your account.

To calculate your Margin for a particular instrument you will need to do the following: (Please note that the Margin requirement for Share CFDs is between 3% and 10%, for all Indices the margin requirement is 1%).
Price x Number of Contracts = Total Contract Value Then Total Contract Value x 1%, 3%, 5 % or 10% = Margin Requirement

Variation Margin
Variation Margin is the difference in margin requirement once you have opened a position, and provides for trading profits and losses.

Example
You buy 2000 Partygaming CFD’s, at 140.25. This provides a notional position of 2000 x 140.25p = £2,805. Partygaming is margined at 5% so you would need at least £140.25 Initial Margin to hold this position. If Partygaming’s price goes down to 138, you would now show a loss on your account of £45 (2.25p lost at 2000 CFDs). This loss (known as variation margin) is subtracted from the Initial Margin of £140.25, leaving a deposit of £95.25 However, you still hold Partygaming at a position of 2000 CFDs now at 138. This gives a notional value of £2,760 (i.e. 2000 X 1.38). Knowing that Partygaming has a 5% margin requirement, you would need a minimum of £138 Initial Margin to cover this position. As your Initial Margin is now only £95.25, you are in deficit margin by £42.75. This shortfall or deficit is known as Shortage in Equity, and you will be required to add additional funds to maintain the position.

Margin Requirements
Different products have different Initial Margin requirements. Within the individual instrument areas of this Trading Guide you can see the different Initial Margin applicable by instrument.

Equity Balances
The equity (or balance) on your account will fluctuate according to the money you have deposited in your account, according to the trading conducted on your account and positions held. During the trading day your account balance(s), including all open positions, are valued against the prevailing market mid rate. Therefore your equity balance is constantly calculated in-line with market movements. This equity balance is calculated at the end of the day using the mid-closing rates (or the last traded price). This equity balance is used to assess your available margin against current positions, and potential new positions you may wish to take.

The balance is used to establish if there is a requirement for additional margin deposits on your account. Once a position is opened both Initial Margin and Variation Margin requirements must always be maintained for the open position(s). It is your responsibility to ensure that your account is sufficiently margined at all times, especially during volatile trading periods. To assist you to monitor your equity we summarise your equity together with your margin requirements in your daily confirmation and our Help Desk can provide you with your open position and equity report on-line.

Please Note: You will only be allowed to trade and maintain open positions on the basis of cleared funds on your account, not on promised funds or funds in transit.

Shortage of Equity
A shortage in equity occurs when the Equity Balance falls below the required Initial Margin deposit. If your account has a shortage in equity you should only reduce your open positions, at least until the Equity Balance in your account is in excess of the required Initial Margin deposit.

Margin Calls
If the market moves against you and your Equity Balance falls below your Initial Margin requirement you have the option to:

i) Close one or more of your open position(s), in order to reduce your Initial Margin requirement to the required level; and/or

ii) Remit further funds to your account as deposit in order to maintain the Initial Margin requirements. We may or may not make a margin call in these circumstances, (which is a request for you to deposit additional cleared funds on your account to maintain your open positions). In any event if you fail to maintain sufficient margin on your account or sufficient funds on your account to meet the margin requirement then we may close your open position(s) or take any action that we deem necessary. Once your equity falls below your initial margin requirement, it is advisable that you place a ‘stop loss’ order with us to try and avoid a deficit balance on your account. Our policy is not to provide credit facilities on any accounts.

Liquidation / Stop Out Level
We may place ‘Stop loss’ orders for your open position(s), at a level where the total Equity Balance falls below our minimum required Initial Margin requirement. This level is referred to as the ‘stop-out level’, below which your open positions may be automatically closed out or ‘liquidated’. All liquidations on your account will be undertaken at a reasonable and fair valuation. You will be liable for any loss in the account as a result of any such liquidation.

Once the stop-out level has been triggered, you will not be allowed to trade on your account until the Equity Balance is restored to the required Initial Margin level. Margin calls can be made at any time during the day and alternative payment arrangements must be made if you cannot be contacted or if you are travelling. Please refer to our Terms of Business, which addresses the non-payment of margin calls and change in margin requirements.

Trading Profits / Losses
Profits made on your trading activities increase the Equity Balance on your account. Any surplus equity may be withdrawn from your account, on request. Losses made on your trading activities decrease the Equity Balance on your account, and therefore the margin available for trading or holding positions.