With CFDs, you don’t actually own the underlying instrument you’re trading in, so you only have to pay a small deposit or margin to open a position. CFDs can increase your return on investment; however losses can equally be magnified.

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Leverage and CFD Trading

With CFDs, you don’t actually own the underlying instrument you’re trading in, so you only have to pay a small deposit or margin to open a position. CFDs can magnify your return on investment, however losses can equally be magnified.

Conventional trading

You want to buy 10,000 shares in Company Z which cost 260p. You need to pay £26,000 (10,000 x 260p) to buy the shares. Your total exposure is £26,000.

CFD trading

Your initial investment depends on Company Z’s margin deposit rate. Let’s say it’s 15% – you’ll pay just £3,900 (10,000 x 260p x 15%) plus any commission for the same £26,000 exposure.

Potential for greater returns

Your initial investment is smaller with CFDs, yet your exposure is the same. So there’s the potential to make higher returns. With CFDs, if the price of Company Z went up by 10%, your profit would be £2,600. That’s a 67% return on investment, even though the asset price only increased by 10%.

Potential for greater losses

Leverage works both ways. If the price of Company Z dropped by 10%, you’d lose the same £2,600. That’s why it’s important to consider your attitude to risk before trading CFDs. While they offer the potential for bigger gains, you could lose part, all or even more than your initial investment if the price goes against you.

CFDs and Financial Spread Trading carry a high level or risk to your capital and you should only deal with money you can afford to lose. The value of investments can fall as well as rise and you may lose significantly more than your initial margin payment. We do not recommend that trading in these products is suitable for all types of investor. We recommend that you consult an independent financial advisor if you are uncertain whether they are right for you.

Barclays CFDs are provided by GAIN Capital UK Ltd. All dealing, administration and settlement is carried out by them.

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<a href="https://www.barclaystradinghub.co.uk/home/what-is-cfd-trading/leverage-cfds.html"><img src="https://www.barclaystradinghub.co.uk/content/dam/bwpublic/global/images/aspect-ratio-1-0/BTH%20images/Leverage_Infographic_Final-v2.jpg" alt="Leverage and CFD trading" width="640" border="0"/></a><br />Source: <a href="https://wealth.barclays.com">Barclays Wealth and Investment Management</a>