subject: Introduction to CFDs - Trading with Demo Money - Margins [print this page] Introduction to CFDs - Trading with Demo Money - Margins
CFD
The 'CFD' (Contract for Difference) was developed to allow clients to enjoy all the benefits of owning a stock, Forex, Index or Commodity position without having to physically own the underlying instrument itself. A CFD can be any type of financial instrument including: Shares, Forex, Indices and Commodities.
For example, instead of purchasing 1,000 Microsoft shares from a stockbroker, a client could instead buy a 10 CFDs of Microsoft on the Plus500 trading platform. A $5 per share rise in the price of Microsoft would give the client a $5,000 profit, just as if he had purchased the actual shares that are traded on the exchange. A major difference is that there are no exchange fees and many of the inefficiencies of trading the underlying shares on the exchange are eliminated.
Plus500 can offer CFDs with zero commissions and very attractive margin requirements. CFDs have grown in popularity dramatically over the past few years, and we believe that this will increasingly be the preferred way to trade the financial markets.
The other major benefit of trading a CFD is the fact that the client can trade on margin. CFD trading means clients can trade a full portfolio of shares, indices or commodities without having to tie up large amounts of capital. Using the example above, a client purchasing $50,000 worth of CFD Shares will only be asked for $1,000 margin.
Trading with Demo Money
The best way to learn how trading works on a Forex platform is to download our free software, open an account and trade with demo money. Also read through the online help pages to get you trading quickly and effectively.
Free Demo Account features:
* No time limit
* Real market conditions - everything exactly as real trading conditions
* No risk - learn all the Forex platform features without risking your capital
* Setup, check and simulate trading strategies
* Online help and support team backup
Margins
Margin Call
The Maintenance Margin Level is the minimum amount of equity you need to maintain an open position. If your equity falls below this minimum amount, the Forex Platform will execute a Margin Call and close any open positions until your account equity exceeds the Maintenance Margin Level requirement.
Example of how a Margin Call can occur:
You signed up and deposited $600 via credit card
Balance: $600 (Deposits - Withdraws + P&L of closed positions)
Available Balance: $600 (Balance + P&L of open positions - Initial Margins)
P&L = $0 (total profit and loss of all open positions including daily premiums)
Equity: $600 (Balance + P&L of open positions)
11.30am - you buy 10 Google Shares (CFDs) at $540.00
The total amount you bought is: 10*$540.00 = $5400
The Initial Margin that is needed for 10 Google Shares is 10%: $540
The Maintenance Margin that is needed to maintain 10 Google Shares is 5%: $270
If your equity falls below $270 you will get a Margin Call. The Forex Platform will liquidate your open positions.
Balance: $600.
Available Balance after you bought the Google shares is: $60 ($600 - 10%*$5400)
P&L = $0
Equity: $600 ($600 + $0)
12.15pm - Google shares fall to $520
Balance: $600
Available Balance: $0 ($600 - 10%*$5400 + 10*($520-$540))
P&L = -$200 (10*$520 - 10*$540)
'Equity' is $400 (-$200 + $600)
1.10pm - Google shares fall to $490. You get a Margin Call and the Forex Platform liquidates your position.
Balance: $600
Available Balance: $0 ($600 - 10%*$5400 + 10*($490-$540))
P&L = -$500 (10*$490 - 10*$540)
Equity: $100 (-$500 + $600)
The reason you get a Margin Call is because your Equity is $100 and you need $270 to maintain an open position on 10 Google Shares. Therefore, the Forex Platform has liquidated your position. Your current balance is:
Balance: $100 (Balance changes only when closing a position or withdrawing funds).
Available Balance: $100 (Deposits - Withdraws + P&L of closed positions)
P&L = $0 (no open positions)
Equity: $100 (Balance + P&L of open positions)
Initial Margin
In order to open a new position, available account equity must exceed Initial Margin Level requirement. The Initial Margin Level requirement is specific to each financial instrument.
To see the Initial Margin Level for a specific instrument go to the main lobby screen of the Forex Platform, select the instrument you wish to view and click on Details' on the far right hand side of the screen. A popup box will appear and the Initial Margin Level in shown in the top right hand corner of the box.
Maintenance Margin
In order to keep a new position open, you must ensure the available account equity exceeds the Maintenance Margin Level. Maintenance Margin Level requirements are specific to each financial instrument.
To see the Maintenance Margin Level' for a specific instrument go to the main lobby screen of the Forex Platform, select the instrument you wish to view and click on Details' on the far right hand side of the screen. A popup box will appear and the Maintenance Margin Level in shown in the top right hand corner of the box.
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