Initial and Variation Margin

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Initial Margin

The initial margin is the amount required to open a position and typically varies from 3-5 per cent for the large, liquid stocks at the top end of a market or index, to up to 80 per cent for smaller, less liquid stocks at the bottom end of a market or index. Margins are charged to cover the CFD provider if the price moves dramatically against the client’s initial position. Margin amounts are deposited back into the client’s account as and when trades are closed out.

Variation Margin

The variation margin is the difference between the value of the CFD trade at the point of entry, and its value when marked to the closing price at the end of each day (this is known as marked to market). If the client’s total equity falls below the initial margin requirement lodged at the beginning of the trade, a margin call will be made. The client must now either deposit further cash into his or her account, or close out open positions in order to meet the margin requirement.

In return for the privilege of being able to trade on this minimum margin, the CFD provider charges interest on the full face value of the underlying position. Interest is calculated daily on all long positions held overnight. Similarly, interest is paid on the face value of any short positions held overnight. This interest charge is normally calculated at the overnight cash rate (or a similar benchmark) plus or minus a set percentage as determined by the CFD provider. This is known as a haircut or edge. CFD providers make a profit from these haircut additions to the interest cost.

CFD commissions or brokerage rates on trades are charged on a percentage of the size of the face value of the trade. These apply to both the entry side and the exit side of the trade. They are, however usually significantly less than commissions charged by traditional equity brokers.