What Is Leverage And How Is It Used In Trade?

 What Is Leverage And How Is It Used In Trade? 

A key feature of CFD trading is leverage, a powerful tool that also goes by the English name leverage. 

Leverage offers traders to take advantage of relatively small price changes, greater flexibility and extend your exposure. It is therefore hardly surprising that the leverage and its effect have made CFD trading so popular.

Simply put, leverage is the tool with which your initial investment in a CFD gets more significant exposure in the same asset. The result is a leverage effect, which implies that CFDs increase the potential profit.

Let’s take a look at an example to concretize the leverage in CFD trading for an underlying asset where the collateral requirement/margin is 5%.In other words, traders are required to invest a minimum of 5% of the amount they wish to trade with.

We are going to examine what the corresponding trade would look like if an ordinary broker executed it.

Ordinary stock trading with the stock ZX

You want to buy 1000 shares in the company ZX which costs 250 USD. Your total investment is, therefore, USD 250,000, i.e. USD 250 x 1,000 shares.

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CFD trading with the share ZX

If you instead choose to trade CFDs for the same share, it would be equivalent to you buying 1000 CFD contracts for the same company stock in the belief that the value will rise. But the advantage of CFDs is that you can use leverage to get the same exposure but with a smaller investment. In this case, it is a 5% security requirement or margin, which is equivalent to USD 12,500 that you need to invest for you to be able to trade with 1000 CFDs for the stock ZX.

The calculation is as follows:

USD 250 per CFD for share ZX = 1000 x 250 = USD 250,000

5% of USD 250,000 = USD 12,500

This means that if you choose to purchase CFDs for ZX, an investment of USD 12,500 is enough to buy 1000 contracts. Compare this with buying the share from an ordinary stockbroker and then having to invest as much as USD 250,000 to be able to buy the same number of the same share.

We hope our leverage article has given you the information you need. The next natural step is to check in with one of the CFD brokers we can recommend to take part in some of their training materials to read more about how to trade with leverage:

Virus cases rise in the U.S., causing stocks to fall from record heights.


The U.S. stock market declined last week, as the negotiations over a new Covid-19 relief package ran into a setback.
Wall Street’s major indices finished mixed on Friday. The Dow Jones Industrial Average gained 0.2%, while the S&P 500 Index declined by 0.1%, and the Nasdaq Composite Index ended 0.2% lower. For the week, the Dow fell 0.6%, the S&P 500 dropped 1%, and the Nasdaq finished 0.7% lower.
The CBOE VIX Volatility Index, commonly known as the VIX, rose 3.5% on Friday to settle at 23.31 on a scale of 1-100 where 20 represents the historical average. For the week, the so-called “fear index” rose 12.1%.

Live4 Trading provides VIX CFD Brokers list.

Setting up a CFD Trading Demo Account

Before choosing a CFD provider, you should take a free demo trading account test drive. Setting up a CFD Trading demo account is a straightforward task. You have to fill a standard registration form; with necessary personal information such as telephone number, email address, username, and password, and then get started.
When you register a demo account, you’ll be given direct access to a demo trading platform, together with a pre-set balance of- virtual funds’ to practice. The purpose is to simulate actual trading experience as closely as possible so that you can get experience, training, and knowledge of the platform’s features, markets behavior and evaluate your trading skills. The key difference is you won’t be investing real money, so you can examine and test risk-free. However, demo trading is not limited to novices. Seasoned traders often use demo accounts to test new tools or strategies, a safe bet since they won’t cause any actual losses.
When real money’s at stake, executing a new trade and closing an existing one will seem a lot more daunting. And it would be best if you secured against the false sense of certainty that the risk-free demo trading environment provides.

Testing a few different providers by opening a free demo CFD account would help you choose a CFD broker.

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