The margin requirement depends on the market you’re trading on. At IG we require 2% margin for major currency pairs, and 25% or more among less popular, or more volatile, shares and indices.
Say you want to buy 1000 shares of Company ABC, currently at a price of $4.75 a share.
If you traded these shares traditionally, it would cost you $4750 (1000 x $4.75). If, however, you placed a CFD trade on the equivalent of $4750 worth of shares, you might only be required to pay a margin of as little as 10% of this value, which would be $475 ($4750 x a margin requirement of 10%).
If the share price then rose to $5.00 your profit would be $250 in both cases. With margin, however, you’ve only had to put down $475 instead of the full $4750.
2. Maintenance margin
Because your initial margin only represents a small portion of the full value of your trade, if the market moves against you, it might not be enough to cover your losses.
Maintenance margin – also known as variation margin – is the extra amount you need to pay should this happen. It will increase as your losses increase, so you need to ensure there’s enough money in your account to cover maintenance margin at all times.
Calculating maintenance margin
Say you want to go long on Company XYZ. It has a buy price of $2.20, and you choose to trade 8,000 shares.
Your trade has a total value of $17,600 (8,000 x $2.20), and your provider asks for a margin of 10%.
This means your initial margin works out at $1760 (10% of $17,600). As you have $4000 in your account, you have enough funds to open this position.
Company XYZ’s price then drops 50 points to $1.70. This reduces the overall value of your position to $13,600 (8000 x $1.70).
Although this reduces your initial margin to $1360 (10% of $13,600), you now have a running loss of 50 points. This means you now owe maintenance margin of $4000 (8,000 x $0.50 points) bringing your total margin requirement to $5360. This example is illustrated in the table below.