Free Margin & Its Role in CFD Trading

Margin in CFD trading is the deposit that is needed to open and continue a leveraged position while engaged in CFDs and spread trades.

As you trade on margin, you will enjoy complete market exposure by only submitting a fraction of a position's full value, whereas, without margin, retail traders' access to the broader financial markets would be rather limited.

Ultimately, margin can change your trading experience, be it CFDs or standard investing.

What Is Free Margin & How Does It Work?

Free margin refers to the equity in a trader's account that is not tied up in a margin for open positions. In other words, free margin is the usable margin that traders can use during their investing pursuits.

Used margin is the amount of account equity currently committed to maintaining open positions, but free margin is the difference between equity and used margin. So, this is the amount that is available to open new positions if needed, and it is also the amount that can be moved against existing positions. If the open positions are profitable, traders' equity will increase, and so will their free margin. Similarly, if open positions lose money, equity decreases, and so does the free margin.

Traders can use free margin to determine how much room they have on their current holdings before they are hit with a margin call. Margin calls generally occur when the account's margin drops below 100%.

Free margin also lets traders know how much they can withdraw from their account if they have no hedged positions.

» Learn more about margin calls, what they are, and how to avoid them

How to Calculate Free Margin

When you want to calculate the margin needed for a long position for the price of the stock purchase, you will need to multiply the number of shares x the price and the x margin rate.

For example, if your equity is $1,000 and you have used $500 of your margin, your margin level is ($1,000/$500) x 100.

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Free Margin in CFD Trading

When you trade with CFDs, you need leverage, a key feature of the contract, and it is important to know your margin as it enables you to evaluate open positions.

Free margin tells you where you stand. You must have the necessary funds in your account to keep your CFD trade running as this is needed to cover your margin. Free margin gives you that backing and ensures you do not reach a situation of a margin call, enabling you to always have something on hand to cover your losses (if any).

Advantages of Free Margin

Free margin is very useful when trading CFDs as it allows traders to avoid margin calls and to use their margins sensibly—there is no logic in risking the total funds in a trading account as this can increase the risk of a margin call.

Free margin gives you leverage—it is the amount of money you keep in your account that you can use for opening additional leveraged positions. It is equal to the funds in your trading account minus the funds already acting as collateral for your existing leveraged positions.

Most traders try to ensure their free margin does not fall to zero because that would leave them with only used or required margin. In such a scenario, brokerages can close a trader's open positions. As a result, it is well worth a trader's time to closely monitor their free margin and ensure it does not fall to zero, as this can increase the risk of a margin call, and no pending orders will be executed without a free margin.

Free margin can also be seen as a risk management indicator, providing a buffer amount before a margin call or forced liquidations.

Risks of Free Margin in CFD Trading

Free margin is a constantly changing balance. Prices move throughout the day thus the free margin can also fluctuate constantly. That is why traders must monitor their margin levels during the trading day.

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Final Words

In the end, traders must be vigilant of their free margin because if it decreases, they will not be able to cover their losses. There is no right or wrong percentage of free margin to have. Some traders believe too much free margin makes them less competitive and risk-averse, while others feel it gives them the peace of mind to invest sensibly.