Author: Livia Tay, MY
Last Updated: March 6, 2025
When assisting clients in understanding Contracts for Difference (CFDs), it’s essential to clarify two key concepts: leverage and margin. These terms can often be confusing, so simplifying their definitions can improve client comprehension and confidence.
What is Leverage?
Leverage allows clients to gain greater market exposure with a smaller initial investment. It is expressed as a ratio (e.g., 10:1, 50:1), indicating how much the client can control relative to their invested capital. For example, with a 10:1 leverage, a client can control $10,000 worth of assets with just $1,000 of their funds. While leverage amplifies potential gains, it also increases the risk of losses.
What is Margin?
Margin is the amount of capital required to open and maintain a leveraged position. It is usually expressed as a percentage of the total trade value. For example, a 5% margin requirement means the client must deposit 5% of the trade’s total value to initiate a position. There are two key types of margin:
a. Initial Margin
The minimum deposit needed to open a trade.
b. Maintenance Margin
The amount required to keep a trade open. If the account balance falls below this level, a margin call may be issued.
How to Explain This to Clients?
a. Use simple analogies
Compare leverage to a loan that allows clients to control more than they initially invest.
b. Highlight both potential profits and risks
Ensure clients understand that while leverage can enhance gains, it can also lead to significant losses.
c. Explain margin call
Inform clients that if their account balance drops too low, they may need to add funds to maintain their position.