What Is Leverage in CFD Trading?
When opening a margin-based account with a regulated CFD broker, traders gain access to leverage. Leverage allows traders to control much larger positions than they could in direct asset trading.
Essentially, the broker lends the trader extra capital to increase their market exposure beyond what their account balance can support. This allows traders to realize more significant potential profits without committing as much upfront money. Leverage is a critical feature that makes CFD trading appealing to many traders.
Clients open what is known as a “margin account” with their broker to trade CFDs. The broker requires traders always to keep a minimum cushion of capital in their account, known as the “initial margin” or “deposit margin.” This serves as collateral for the loaned money the broker provides through leverage.
As trades incur profits or losses, the equity in the trader's account will fluctuate. If losses are substantial enough to deplete the account equity below the “maintenance margin” level the broker sets, a “margin call” will be issued. This requires the trader to deposit additional funds to restore the equity cushion in their account to the minimum threshold.
For example, if shares of ABC Company trade for $100 and a CFD trader wishes to control 10,000 shares with a 5% initial margin, the required deposit would be:
$100 x 10,000 shares x 5% initial margin = $5,000
Instead of tying up $100,000 to control the 10,000 shares outright, the trader uses leverage to maintain the same market exposure for only a $5,000 initial outlay.
Even though this is far less than $100,000, you still receive the same amount of exposure as if you had purchased the shares outright. In addition, you are eligible to keep all profits. However, you will also be responsible for any losses.
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Can You Trade Without Leverage?
It is possible to trade CFDs without leverage on some trading platforms. This is done by using a 1:1 leverage ratio. This means you are investing the total value of the asset without any borrowed funds to multiply your position size or exposure. Trading without leverage is appealing for beginning traders starting and learning the markets.
While leveraged CFD trades can boost your potential returns, it also increases the risks involved. By removing leverage from your trades, you significantly reduce the risk associated with any position. Of course, trading with no leverage does not guarantee you will make a profit or prevent you from losing money. It simply avoids multiplying those outcomes through the power of influence.
Reducing or removing leverage may be advisable when starting as a CFD trader or testing a new broker's trading platform. The potential for leveraged gains and losses can be dangerous in the hands of an inexperienced retail trader. Leverage acts like a double-edged sword — accelerating your profits and losses.
However, not all brokers or platforms allow you to trade contracts for difference without using leverage. The ability to leverage your position is one of the major attractions of speculating on CFDs versus selling the actual underlying asset itself. Keeping an unleveraged position on an investment, like a share price, is similar to holding the share. You lose out on certain advantages like dividend payments, seeing market depth thanks to an exchange-traded market's transparency, and lower counter-party risk.
Trading with no leverage might be advantageous if you are trading an underlying asset that is very volatile, as price swings in such an item can result in significant gains — or losses — that justify your transaction.
Pros of Trading CFDs Without Leverage
1. Reduced Risks
The main benefit of trading without leverage is reduced risks. If the value of your investment decreases, you will only lose the capital you invested, not the money you borrowed. This makes trading without leverage much less risky than trading on margin.
2. Increased Discipline
Another advantage of trading without leverage is improved discipline. With less ability to take prominent positions, you'll be less tempted to make unnecessary risky trades. This can lead to more consistent profits over time.
3. Easier To Manage
Highly leveraged trades can lead to large fluctuations in investment value that are difficult to manage and may cause impulsive decisions you later regret. Trading without leverage is also easier to track since you tend to have fewer open positions.
Cons of Trading CFDs Without Leverage
1. Lower Profit Potential
Trading without leverage means you cannot amplify your gains. For example, if you invest $10,000 and make a 5–10% profit would earn $500–$1,000. This income level may be attainable through a regular job without the risk of losses.
2. Requires More Upfront Capital
When trading without leverage, you must provide the total value of your position sizes up front. This ties up more of your capital in each trade.
3. Limits Simultaneous Positions
Since you must outlay the entire sum per position, most investors can only afford to open 1–2 trades at once without leverage. This severely limits your ability to diversify across multiple assets.
Making an Informed Decision on Which Option Is Best for You
When you determine if trading CFDs without leverage aligns with your strategy, consider whether the instruments and volatility provide profit potential minus the purchasing power of margin trading. While more capital-intensive, non-leveraged CFDs may suit those with $10,000+ accounts seeking to open multiple positions across assets for diversification.
Leveraging CFD trades depends on your risk tolerance, trading style, and capital. New traders should start with a small account and no leverage to limit losses while gaining experience through demo trading. Once confident in your abilities, you can slowly incorporate influence aligned with your goals and risk management. You can assess your financial objectives and risk appetite to determine if CFD trading without leverage suits your strategy.