How Do Margin and Leverage Work?
Leverage* enables traders to multiply their exposure to a financial instrument without committing the entire capital upfront. It effectively allows you to trade positions larger than you could on the underlying market using the amount of money in your trading account. For example, a leverage of 1:50 means you could use $200 to open a trade valued at $10,000. This means that both profit and losses are magnified. You can see an instrument’s leverage ratio and its margin requirements by clicking the instrument information button.
*Leveraged trading activity involves substantial risks for losing all of the invested funds in a short time period.
Leverage and margin go hand in hand. Margin is not a fee or a cost, but rather a deposit amount that you must put down in order to open a trade based on the size of the contract and the asset in question. The minimum margin requirements vary based on the jurisdictions traders are located in and client classification (i.e retail or professional) and this is only relevant if you are a retail client. Margin requirements may change, but this would only affect new positions and not existing positions*. Margin is usually expressed as a percentage of the full cost of the position. The initial margin requirement is based on the pre-set leverage for the asset class of the instrument you are trading. You can see the exact margin requirement and the leverage ratio for the instrument in the Trade screen when you set up your trade.
*Where margin requirements are changed in order to comply with regulatory requirements, new positions may be affected and existing positions may be subject to closure (subject to operator).
Initial margin represents the percentage of the purchase price of the contract. You can see the total sum of the initial margin on the trade screen when you set up your trade or order.
Maintenance margin represents the amount of equity you must maintain in your trading account balance after the CFD transaction has been executed - in order to keep your trade open.
If your account balance approaches the Maintenance Margin requirement, Plus500 may issue a Margin Call alert. If funds are not deposited before the account balance falls below the maintenance margin requirement, the system will automatically close one or more of your open positions until such time as the account balance exceeds the maintenance margin level of the remaining open position(s). Margin Call alerts are not to be relied upon as a risk management tool and it is your responsibility to monitor your account and make sure you have adequate funds to cover the margin requirement of all of your open positions.
Fees and Overnight Charges
In leveraged trading you only need to put down a percentage of the total value of your position in order to open the trade. There is no fee or interest for short term trades that close within the same day. Except where there is an expiry date for an instrument, Plus500 allows you to keep your trade open until you wish to close your position, or until your profit or loss targets have been met. There is, however, an overnight fee for keeping the position open beyond a certain cut-off time, and is deducted from your account balance. Each instrument has its own predetermined hours and fees. To see the overnight fee and the time of day that the overnight funding applies, please click on the instrument information icon in the Trade screen. You can learn more about Plus500’s overnight funding here.
Currency Conversion Fee
Plus500 will charge a Currency Conversion Fee when you trade an instrument denominated in a different currency to that of your account currency. The Currency Conversion Fee is up to 0.7% of the realized profit and loss for such a position and it is reflected in real-time into the unrealized profit and loss of an open Position and will be charged once the Position is closed. Currency conversion fee amounts depend on your region.
What is a Rollover?
Instruments such as oil or gold are based on futures contracts for a specific month. In most cases, they are for the current active month. Futures contracts have predefined expiry dates, meaning at a certain date and time the contract will automatically close (unless rolled over to a new contract of the next -month). When trading CFDs on futures, your contract will be automatically rolled over to a next futures contract and its value. Stop and limit orders are also adjusted to reflect the price of the instrument in the new contract. Plus500 does not charge for this rollover service but there could be a change of the valuation of the CFD based on the change of the underlying asset. To learn more about Plus500’s rollover service, please follow this link.
In order to nullify the impact on the valuation of the open position, given the change in the underlying instrument’s rate (price) for the new contract period, a compensating adjustment is made to the account. The value of your position continues to reflect the impact of market movement based on your original opening level, size and spread. If the new contract is trading at a higher price, Buy positions will receive a negative adjustment, and Sell positions will receive a positive adjustment. Conversely, if the new contract is trading at a lower price, Buy positions will receive a positive adjustment, and Sell positions will receive a negative adjustment.Example of rollover adjustment calculation:
You hold a Buy position of 100 contracts of Oil futures. Oil futures rates at the time of rollover:
- Existing contract Buy rate = $61.30
- Existing contract Sell rate = $ 61.25
- New contract Buy rate = $62.50
- New contract Sell rate = $ 62.45
Sell Rate Difference = [New contract sell rate] - [Existing contract sell rate] = $62.45 - $61.25 = $1.20
Buy Position Adjustment = - ([Amount of contracts] * [Sell rate difference]) = - (100 * $1.20) = - $120
Some instruments available on the Plus500 platform are based on futures contracts. Futures contracts have expiry dates. If you have a CFD position for an instrument that has an expiry and a rollover date, these will be rolled over at the expiry to the next futures contract expiry. You can find the current Futures contract and the automatic roller over date in the info window for each asset.
In addition, every Option* CFD comes with an expiry date. If the rate of the underlying instrument does not reach the Strike Price before this date, the Option CFD will expire and the last price is based on the last available rate (and not zero).
Also, Cryptocurrency* CFD positions will expire at a predetermined time, which will be displayed in the instrument’s details section.
*Subject to operator.
There are several corporate events that can take place in the underlying market that can affect the value of your Share CFD. Even though you do not actually own shares in the Company, some corporate events have a direct effect on the holders of Share CFDs. These include dividends, spinoffs, rights issues and stock splits. These do not happen often and only affect Share CFD traders at the time of the corporate action.
Dividends are issued and paid to the holders of physical shares of a company. They are also paid out to Share CFD traders if you have an open BUY position in a Share CFD when the dividend is issued (ex-dividend date). If you hold a SELL position in a Share CFD, a sum will be deducted from your trading account balance.
Risk management is all-important when trading online. Developing a strong risk management process will help you filter out high-risk trades and keep you aware of your risk value for each trade. Leverage helps ramp up your trading, but it also magnifies your risk. You should consider adding a ‘Close at profit’ or ‘Close at loss’ to the positions you open, if this is appropriate for your personal trading strategy. These are available in the trade order window.
By setting these limits when you are initiating your trade order, you will minimise your losses as you have instructed the system to close your position if it moves against you. By setting the take profit level, as trades move up and down continuously, your instruction to the system will be activated when the price level is reached even if it is only touched momentarily. Using these risk management tools will help you stay aware of your profit and loss potential for each trade.
You should determine a profit/loss ratio that fits your experience, knowledge and risk appetite, and make sure that you do not enter a trade unless it fits those standards.
Bull vs Bear Markets
A bull market is an appreciating market, where traders are eager to increase their long trading activity (also known as ‘Going Long’).
A Bear market is a market on the decline, where you expect prices to fall, indicating there is going to be more losses in the markets. In a bear market, the market sentiment is towards Going Short.
FOREX | SHARES | INDICES | COMMODITIES | CRYPTOCURRENCIES* | OPTIONS*