• Guide to CFDs
• How CFDs Are Priced
• Trading on Margin
• Advantages of Leverage
• Disadvantages of Leverage
• How Risky Is CFD Trading?
• Cutting Out Risk In CFD Trading
• CFDs and Tax
• Long Term vs Short Term
• CFD Trading and Orders
• Trailing Stops
• Markets and Indices Explained
• CFD Trading Myths
• How To Be A Successful CFD Trader
• Plan To Successful CFD Trading
• CFD Trading Know-How
• Why CFD Traders Lose
• How To Lose As A CFD Trader
• Day Trading With CFDs
• How To Spot CFD Opportunities
• Profit and Loss with CFDs
• CFD Trading Do’s
• CFD Trading Don’ts

The advantages of leverage make perhaps the most compelling case of all for investing in CFDs as an alternative to straight, pound for pound investments. Afforded by the advent of margin trading, leverage has the power to inflate transaction sizes to artificially high levels, allowing for much larger gains to be made on comparatively smaller investments, meaning deployed capital can work much more efficiently than would otherwise be the case, and can deliver returns much more swiftly than most investors would otherwise expect.

Leverage works by establishing a casual borrowing relationship with the broker. Generally, this is offered to traders along with their CFD trading account, and there is no need to apply for leverage or ask your broker to do anything out of the ordinary. Put simply, leverage is automatic, notional funding that is applied by the broker to ‘make up’ to the total transaction size. In many cases, this is done in a ratio of around 1:20, with traders required to fund £1 of every £20 of the total transaction size.

This is equivalent to a margin requirement of 5%. So, for every trade you enter, you stump up 5% of the transaction in the first instance (which is deducted from your available capital), and then (crucially) keep the earnings on 100% of the transaction. When the market moves positively behind your position, you can close out, automatically repaying the amount of leverage footed by the broker in order to absorb the profits from your transaction.

Consider the following practical example. You see a CFD in Company X that catches your eye. With strong reason to believe that Company X will increase in its value over the duration of your investment, you decide to buy CFDs at £1 each to maximise your chances of a return. With £100 capital on the line, you buy £2000 worth of CFDs – bought with the 5% capital deposit of £100 plus the 95% leverage of £1900. When the value of Company X CFDs rises to £1.50, you decide to settle your position and sell up to take your profit.

The profit calculation becomes (£1.50 x 2000) – (£1 x 2000) + £100. Therefore, the profit portion from the trade is worth £3000-£2000+£100=£1,100. On a £100 initial investment, this represents an enormous return on investment that is simply unmatched with alternative means of trading the markets. Of course, this is a simplistic analysis of the figures, and in real life trading scenarios tend to be much more complicated and far less smooth. But it does go someway towards giving an indication of the most significant advantage of leverage.

Note that the leverage portion is silent in the transaction, and is borrowed and repaid without any input from the trader. The only point at which you will be required to act as a result of your leveraged dealings is in the event that the margin amount falls below 5% of the total transaction size, at which point any other liquid capital will be applied to your account, or any profitable positions liquidated to account for your liability. Of course, if the transaction loses value, you still have to repay the leverage amount – even where this extends beyond the amount you have remaining in the trade or in your account.

But aside from being purely a mechanism for boosting profits, leverage can also be a great help in reducing the aggregate losses from your trading portfolio. Imagine you’re sitting with a portfolio with 8 share positions and 2 CFD positions. If you’re down on your share positions, you better believe a profitable CFD position will help eat in to your liabilities. Remember that trading is a game of aggregates, and when aggregating a profit is what you’re after, CFD positions that work to efficiently return capital can be vital to composing a solid and profitable portfolio. Thus, leverage can be greatly advantageous, both as a profit-getter and a loss off-setter, combining the key characteristics of fast and efficient capital return to provide you with a range of trading benefits.

With the same breath, it’s critical to remember that leverage isn’t just a golden chalice from which you can make your fortune, but also a weapon that is potentially fatal to your trading career. In fact, for most traders, the disadvantages of leverage should be read first as a necessary dampener to the excitement that margin trading can instil, to ensure you don’t take unnecessary risks in the process of your CFD trading.