How does margin actually work on a CFD?
Margin is the most misread number in leveraged trading. It is a deposit against a much larger position, and everything that follows from it is division. Read it as a fee, or as a cap on what the position can cost you, and the rest of the arithmetic comes out wrong.
The two numbers and the ratio between them
- Notional — the full value of the position: units × price.
- Margin — the cash you must have to hold it.
Leverage = Notional ÷ Margin. A 5% margin requirement is 20:1. A 20% requirement is 5:1.
Worked example
You open a CFD on 1,000 units of a share priced at $50.
- Notional: 1,000 × $50 = $50,000
- Margin requirement at 20%: $10,000
- Leverage: 50,000 ÷ 10,000 = 5:1
Now watch what an ordinary price move does. Profit and loss is always computed on the notional, never on the margin:
| Price move | P&L on $50,000 notional | As % of the $10,000 margin |
|---|---|---|
| +1% | +$500 | +5% |
| −1% | −$500 | −5% |
| −5% | −$2,500 | −25% |
| −10% | −$5,000 | −50% |
| −20% | −$10,000 | −100% |
Every column on the right is the left column multiplied by 5. That is the whole of leverage: your equity moves at L times the asset's rate.
Margin close-out
Brokers do not wait for equity to reach zero. A close-out level is defined — in the UK and EU, rules require positions to be closed when account equity falls to 50% of the required initial margin, and similar mechanisms exist elsewhere with different thresholds.
Apply it to the example. Equity starts at $10,000; close-out triggers at $5,000; so a $5,000 loss ends the position. On $50,000 of notional, that's a 10% adverse move. At 20:1 leverage on the same logic, it would be a 2.5% move.
This is worth stating precisely, because it is often misunderstood in both directions:
- It is a protective mechanism — it stops losses compounding past the deposit in ordinary conditions.
- It is not a guarantee. It executes at the next available price, which in a gap may be far below the trigger. That is the next lesson.
Free margin, and why positions die in profit
Your account's free margin is equity minus margin already committed. Open several positions and the buffer shrinks even if each looks small individually. A cluster of correlated positions — three technology CFDs, or three long positions in the same currency — is one position wearing three hats, and it will hit the close-out level together.
Try it now
- A year of daily candles is below. Scan it for sessions that fell 5% or more and count them — Measure the candidates rather than trusting the eye, because a tall bar on a high price is a smaller percentage than it looks.
- Compute the close-out move for that stock at 5:1 and at 20:1 leverage using the 50% rule above (answers: 10% and 2.5%).
- Count how many days in the year exceeded each threshold. The 20:1 count is usually the number that surprises people — record it as an observation, not a conclusion.