Leverage, Spread and Swap

LEVERAGE

Leverage is a concept that enables you to multiply your exposure to a financial instrument without committing the whole capital necessary to own the physical instrument.

When trading CFDs, you are engaging in leveraged trading, which means you don’t need to commit the full amount of capital for your trade value. For example, with a leverage of 1:10, your initial margin requirement for this particular CFD is 10%. This means you only need to deposit $100 to gain a notional exposure of $1,000.

SPREAD

In CFD trading, the spread is the difference between the buy price and the sell price quoted for an instrument. The buy price quoted will always be higher than the sell price quoted, and the underlying market price will generally be in the middle of the these two prices. ​​

When you place a trade, you will either buy or sell the particular product you’re trading, depending on whether you believe the underlying market price will rise or fall.

Once your trade is placed and the price has moved in your favour beyond the cost of the spread, it will be a profit making trade. Likewise, while it remains between the spread range or outside of it against you, the trade will be a losing trade.

The spread is one of the key costs involved in CFD trading – the tighter the spread is, the better value you’re getting as a trader. Note that there are other potential costs to consider, for example in CFD trading some markets involve a commission charge, or a combination of spread and commission.

The spread is the last large number within a price quote.​

SWAP

When you buy a CFD on a stock, index, cryptocurrency or commodity, you are trading on margin and effectively borrowing capital from the seller of the CFD. There is usually no interest cost if you sell the CFD on the day you bought it. However, if you hold it overnight, you will have to pay interest on the position. This is the Swap Buy Rate and is debited from your trading account.

If you hold a short position overnight using a CFD on a stock, index, cryptocurrency or commodity, you are effectively lending capital to your broker. When your broker sells the underlying asset, they receive cash which earns interest until the position is closed. However, you must also pay a fee to borrow the underlying asset. The interest you earn is netted against the asset borrowing fee and may result in a positive or negative rate, depending on the interest rate. The net rate is the Swap Sell Rate.

 

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