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You Are Here: Home > Stockmarket & Trading > CFD Section > CFD Guide > CFD Margin: How it works
CFD Margin

What is it - How it works

The how do CFDs work page covered deposit margin which is usually between 5% and 20% of the value of the underlying shares.

But all margined products, including CFDs, use 2 types of margin -

  1. Deposit margin - sometimes called initial margin, and
  2. Variation margin - sometimes called mark-to-market margin or maintenance margin
Variation Margin - What is it - How it works

CFDs as you know are different from buying shares in the stockmarket. If you buy 1,000 shares of Vodafone at £1 a share and hold the position for 3 months before selling out at £2, the profit will obviously be 1,000 x £1 = £1,000.

But when buying the physical shares rather than CFDs you won't realise a profit or loss in your account until they're sold, and that's an important point to understand. So in the above example you only earned the £1,000 profit when you sold the shares.

Margined products work differently because all profits and losses are credited and debited from an account in real-time and this is called variation margin. For example -

  • You buy 1,000 of Barclays at £1.00 using CFDs
  • The market moves sharply higher and you sell them 4 weeks later at £2
  • Within this 4 week time period you'll be credited the daily profits and debited the daily losses as the share price moves higher and lower in real-time
  • So although the total trade makes a profit of £1,000 this is credited over the 4 weeks - look at the table below to see this in action
Note, that although the trade is open for a total of 4 weeks I have only indicated the first 5 days of trading to show how variation margin is dealt with from one day to the next.
Day 1
Day 2
Day 3
Day 4
Day 5
Barclays end of day closing price
£1.05
£1.00
£0.95
£1.06
£1.12
Maintenance margin (daily)
£50
(£50)
(£50)
£110
£60
Maintenance margin (running total)
£50
£0
(£50)
£60
£120
What is interesting to note in the above table is that maintenance margin can be both a positive and negative figure. On day 1 it's a positive £50 but on day 3 it's a negative £50 before going positive again on day 4 and 5
Another example - Maintenance margin over 2 days
  • Today you buy 1,000 shares of XYZ Industries at £3.00 using CFDs
  • Tonight they close at £3.25 and so your account will be credited with positive maintenance margin of £250 (1,000 x £0.25)
  • However, the share price reverses the following day and you sell out at £3.00, the price where you initially bought the CFD position
  • £250 in negative maintenance margin will therefore be debited from your account
  • So although it was a scratch trade (zero profit/loss) it looked like you made a profit of £250 one day and then a loss of £250 the next - that's maintenance margin at work
  • Note - in this example I haven't considered commissions or financing charges to keep things simple
Why is variation margin so important

Because CFDs are a levered product.

Without this leverage a trade could go horribly wrong and the trader might not be able to pay the loss when the position is liquidated. But as maintenance margin accounts for any losses on a real-time basis it's hard for a trade to get completely out of hand.

One final point - If you can't pay any margin owed by the end of the day your broker has the right to take over your position and close it, usually of course for a loss. And sadly there's little a client can do in such a situation as the broker's official terms & conditions will have been broken.

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