## This is the most important concept you’ll need to understand to accelerate your account.

## During your trading experience, with gearing, you’ll learn how to multiply your profits. But you can also multiply your losses, if you don’t know what you’re doing.

## So listen up.

## What Gearing is in a nutshell…

## Gearing also known as leverage or margin trading, is the function that allows you to pay a small amount of money, in order to gain control and be exposed to a larger sum of money.

## There is a very simple calculation you’ll use calculate the gearing for both CFDs and Spread Trading.

__Exposure__

Initial margin

__Exposure__

Initial margin

## In order to understand this formula, let’s use three gearing examples with shares versus CFDs and Spread Trading.

## We’ll break it up into three steps for CFDs and Spread Trading:

## 1. Calculate the entry market exposure

2. Calculate the initial margin (Deposit)

3. Calculate the gearing

## We’ll also exclude costs to help simplify the gearing concept better.

**EXAMPLE 1: **

Buying AAS Ltd shares

**Portfolio value: **R100,000

**Company:** AAS Ltd

**Share price:** R109.00

**No. shares to buy:** 100

## If you buy one share at R109 per share, you’ll be exposed to R109 worth of one share.

## If you buy 100 shares at R109 per share, you’ll be exposed to R10,900 worth of shares (100 shares X R109 per share).

## We know that to be exposed to the full R10,900 worth of shares, we needed to pay an initial margin (deposit) of R10,900.

## If we plug in values into the gearing formula, we get.

## Gearing = (Exposure ÷ Initial Margin)

= (R10,900 ÷ R10,900)

= 1:1

## This means, there is NO gearing or a gearing of 1 times, with the share example as, what we paid is exactly as what we are exposed to.

## Easy enough? Let’s move onto CFDs.

**EXAMPLE 2: **

Buying AAS Ltd CFDs

**Portfolio value:** R100,000

**CFD of the underlying Company:** AAS Ltd CFD

**Share price:** R109.00

**Margin % per CFD:** 10%

**(NOTE: Find out on your trading platform or ask your broker for the margin % per CFD)**

**No. CFDs to buy:** 100

**Step #1: **

Calculate the entry exposure of the CFD** **

## Entry exposure

## = (Share price X No. CFDs)

= (R109.00 X 100 CFDs)

= R10,900

## **NOTE: **

**1 CFD per trade, you’ll be exposed to the value of one share.**

**100 CFDs per trade, you’ll be exposed to the value of 100 shares.**

**Step #2: **

Calculate the initial margin of the CFD trade

## Initial margin

## = (Exposure X Margin % per CFD)

= (R10,900 X 0.10)

= R1,090

## This means to buy 100 CFDs, you’ll need to pay an initial margin (deposit) of R1,090.

**Step #3: **

Calculate the gearing of the

CFD trade

## Gearing = (Exposure ÷ Initial margin)

= (R10,900 ÷ R1,090)

= 10 times

## With a gearing of 10 times, this means two things…

## #1: For every one CFD you buy for R10.90 per CFD, you’ll be exposed to 10 times more or the value of one AAS Ltd share.

## #2: For every one cent the share price rises or falls, you’ll gain or lose 10 cents.

**EXAMPLE 2: **

Buying AAS Ltd CFDs

**Portfolio value:** R100,000

**Underlying Company:** AAS Ltd

**Share price:** 10,900c

**Value per point:** 100c (R1.00)

**Margin % per Spread Trading contract:** 7.50%

**(NOTE: Find out on your trading platform or ask your broker for the margin % per share contract)**

**Step #1:**

Calculate the entry exposure of the spread trade

## Entry exposure

## = (Share price X Value per point)

= (10,900c X 100c)

= 1,090,000 (R10,900)

**Note: **

**1c value per point per spread trade– you’ll be exposed to one AAS share**

**100c value per point per spread trade – you’ll be exposed to 100 AAS shares**

**Step #2:**

Calculate the initial margin of the spread trade

## Initial margin

## = (Exposure X Initial margin)

## = (1,090,000c X 0.075)

## = 81,750c (R817.50)

## This means, you’ll need to pay an initial margin (deposit) of R817.50 to be exposed to R10,900 worth of AAS Ltd shares.

**Step #3: **

Calculate the gearing of the spread trade

## Gearing = (Exposure ÷ Initial margin)

= (1,090,000 ÷ 81,750c)

= 13.33 times

## This means, by depositing R817.50 you’ll be exposed to 13.33 times more or R10,900 (R817.50 X 13.33 times) worth of AAS Ltd shares.

## You now know how gearing works with CFDs and Spread Trading, in the next lesson we’ll cover how to never risk more than 2% of your portfolio for each CFD and Spread Trade you take.

## Please make sure, you’re up to date with the previous derivatives articles as you’ll need them for the next lesson.

## Click on the links below now to catch up…

## READ NOW: What are derivatives & why are they a revolution?

## READ NOW: Spread Trading & CFDs For Dummies

## WATCH NOW: How to relate gearing to buying a house (Go to 8:00minutes to watch)

## Do you have any questions on CFDs or Spread Trading? Ask by clicking here, and I’ll answer them in the next MATI Trader Q&A.

## Trade well,

## Timon Rossolimos

**Founder, ***MATI **Trader*

*MATI*

*Trader*