CFD providers all have very different margin rates some offer margins from 1% others start at 5% but are margin rates really crucial in a well balanced CFD trading strategy?
CFD providers will modify their margin rates depending on the financial product over which the CFD relies, as an example foreign exchange CFDs are commonly offered at around 1% margin, the reason for this is simply because the forex market is the largest and most liquid market in the world and the chance of currencies gapping is minimal. On the other hand the margin rates on stock CFDs will generally vary between 5% to around 35%, the reason for higher equity CFD margin rates is because securities are usually less liquid than currency pairs. CFD brokers will evaluate the risk of each share CFD independently and adjust the margin to cover the likelihood of the stock gapping in volatile market conditions.
In determining the margin rates on share CFDs, CFD providers will generally look at the liquidity of the share, its market capitalization and its historical price movements. Based on these three most important criteria along with a small number of other elements a margin rate will be determined. It is important to note that several CFD providers offer CFDs on 100% margin allowing them to provide a greater range of CFDs but providing no real benefit to the customer.
Index CFDs offered by many CFD brokers are a good way of gaining exposure to the general market without needing to buy futures contracts or a basket of shares. Index CFDs are generally offered on margin rates of between 1% to 2%, the margin rate will vary based on the index being traded.
So how do CFD margin rates affect you?
Obviously the lesser the margin rate the more effectively you'll be able to make use of the cash in your CFD trading account thus your return on investment (RIO) will be better, however as CFDs are leveraged financial instruments it is not advisable to make use of the total amount of your deposit as margin, doing this would put you at risk of a margin call or even liquidation.
Usually with a good trading and risk management strategy in place most CFD traders will allocate one-third of their account balance to fulfill the margin requirements for their open positions, one-third will be allocated to fulfill the margin requirements on intra-day or opportunistic trades, the final one-third remains on call to fulfill any additional margin requirements on open positions.
So yes, low CFD margins are important however leverage is only one of the numerous tools in a CFD trader's arsenal and should be used together with a proper risk management plan and well balanced portfolio. Regardless of the amount of leverage you are provided if you don't have a trading plan set you won't be a successful trader.
Author Resource:
You are able to learn more regarding the CFD margin rates availble and discover more information in relation to CFD trading on this web page.
![[Valid RSS feed]](http://www.look4articles.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites
![[Valid RSS feed]](http://www.look4articles.com/images/rss.jpg "XML Feed For RSS")