Margin Changes

"Will you have to raid your Piggy Bank?"

Did you know the margins on CFDs can be changed by your provider?

What the CFD providers chose to do by lessening the margin offered on the CFD is to try and offset the volatility. Depending upon the terms and conditions of the CFD provider, they can apply the new margin on a stock whilst your positon is open, therefore money (extra margin) may have had to have been deposited into your account immediately to avoid a margin call.

Example:

Your CFD trading portfolio may consist of BHP Billiton, Oz Minerals, RIO Tinto, Commonwealth Bank of Australia, Woolworths, Leightons and AMP, and although it is running at a loss you believe that there is some upside to be seen on the resources side.

As the CFD trader is not in breach of their margin requirements, they choose to pay the interest in lieu of closing the positions. An immediate lessening of the margin level on OzMinerals  and Leightons would force the CFD trader to re-evaluate their position as it may push them into a margin call. For the CFD trader who has no reserve cash in their CFD trading bank for such emergencies, they will be forced to close positions to satisfy the margin and therefore realising the losses in their trading bank.

This type of change is commonplace and is within the CFD providers terms and conditions,. What may differ between CFD providers is that some CFD providers may give a couple of days notice for those who have existing CFD trade positions instead of applying the change immediately.

Know your CFD provider

This gives us another example of why it is important to know what your CFD provider is allowed to do (as contained in the FSG and terms and conditions) and what it is likely to do - if in doubt call and ask them!.

You will find that most CFD providers should honour a verbal commitment given to a direct question. It also gives incentive for you to constantly re-evaluate your portfolio with regard to your margin levels and the balance of your stocks.

In determining the amount to place on each CFD trade, we suggest maintaining a constant dollar value exposure on the underlying position. This means that whatever the collateral level, your trading results are all equally weighted towards the movement of the underlying stock. This eliminates the risk of one ‘bad’ highly leveraged CFD trade eliminating more than one ‘good’ lower leveraged CFD trade.

Example: Assuming you wanted to trade (borrow) $10,000 of CFDs, then: