MF Global

Trade on margin

CFDs are traded on margin, starting from 5% for Australian share CFDs. This is a more efficient use of your capital because you only have to allocate a small proportion of the total value of your position to secure a trade, while maintaining full exposure to the market. This enables you to magnify the returns* on your investment.

Benefit from rising and falling markets

Establishing a short position is far easier using a CFD than using physical shares. This is largely due to the exchange rules present in the physical market which do not apply in the CFD market. These rules restrict the ways in which a physical share transaction can be executed. In particular, the "down-tick" rule prohibits an investor from short-selling a physical share into a falling market. With a CFD provider you have the ability to execute a short trade on any published price.

Going short in the physical market may also require a higher margin on the value of the position. CFD providers do not usually distinguish between a long and a short position in this regard.

Therefore, on this basis alone, a CFD is a more effective means for a trader to benefit from falling markets (and short term intraday movements) and can also be used more easily to hedge long positions in the physical market. 

Margins, Liquidations & Leverage

Margin and leverage are terms that are sometimes used interchangeably, but it is important to distinguish between them.

Margin is the amount of deposit required to secure a position starting from 5% for CFDs over Australian shares. The margin is calculated as a percentage of the notional value of the position and is charged to cover the traders' account in the event that the position moves against them.

The Share CFD Margin requirement set by a CFD provider is determined by a range of factors including the liquidity of the underlying security and its capitalisation.

Leverage, also known as gearing, is the ability to take a position with notional value greater than the cash outlay required. For instance traditional share trading has leverage of 1:1. That is, for every $1 of investment the trader is required to pay $1 in cash. A Share CFD position with a 5% margin requirement has leverage of 20:1. That means for every $1 of cash invested the profit or loss will be multiplied by factor of 20. Leverage means returns are magnified and this applies equally to gains and losses.

*Investing in derivatives carries a high level of risk to capital, and due to the potential volatility and fluctuations in value, investors may not get back the amount of their original investment. In certain circumstances an investor may be liable to pay a far greater sum, with losses being higher than an initial deposit.