The leverage of CFD is a mechanism that allows you to operate with equity less than the capital which it operates.
This is a feature of CFDs , which therefore offer the possibility of trading on the financial markets even with smaller budgets than those required in traditional investment (for example, by buying shares in a bank).
In this lesson of the course on CFD trading I will bend in detail how the financial leverage . To better understand how it works, it is advisable to see it applied directly on the trading platform, which can also be accessed through a free no-deposit demo account .
How does leverage work?
In CFD trading, leverage works exactly like leverage in physics, allowing you to lift (or press, etc.) bodies with less effort than the required weight or force without leverage.
In this figure, we see what happens at 1:20 leverage .
As you can see, if you want to trade 20 stocks with a total value of 1,000 euros, the amount required to trade CFDs , thanks to the leverage, will be only 50 euros.
So with leverage, the result is that you only invest a small part of the capital you operate with.
This concept must be clear. For example, if I want to trade € 1,000 in the Forex market, with a leverage of 1:30 instead of investing € 1,000, I can invest “only” € 33.
As you can understand, one thing is to invest € 1,000, another is to invest € 33. For those who do not have a large capital, it is much more feasible.
The capital that is actually required for the investment is called margin . For example, if you invest in a capital of € 1,000 with a leverage of 1:30, the 33 euros that are actually required for the investment represents the required margin .
Of this required margin, a part will be frozen during the opening of the position as collateral to protect the broker (maintenance margin).
We will look at margins in more detail in the lesson on CFD margins.
Financial leverage on stocks
What we have just seen is an example of leverage in the stock markets. Stocks are among the most popular instruments for CFD traders , as CFD brokers generally allow you to trade the most important stocks.
However, remember that with CFDs you can trade various financial instruments, including currency pairs (Forex), cryptocurrencies, commodities, stock indices, and more.
Some brokers such as eToro, on their platform, have thousands of shares to trade , from all international markets.
Another very interesting market in terms of leverage is the Forex. The Forex or currency market, in fact, generally has the highest leverage compared to other markets.
With the entry into force of the ESMA in 2018, the Forex leverage for base clients is 1:30, which compared to 1: 2 for Bitcoin is definitely much higher.
However, for clients with a professional account , the leverage is generally much higher, and on average, brokers have leverage ranging from 1: 300 to 1: 400.
Go to the next lesson: The CFD Trading Platform