Index CFDs

Index CFDs allow you to trade all of the major global indices, tracking the performance of one currency against others. On the index level the workings are similar to that of trading futures except that with a CFD there is no expiry date. The buyer chooses to keep the position open until they feel like closing it. Upon the closure of the contract for difference, the CFD trade is considered to be complete unless there is a difference Incurred by a loss. Indices are typically quoted and traded in pounds, US Dollars, Euros or the local market equivalent.

If you believe that an index is going to rise, you buy a contracts for difference contract and you will make a gain if the index goes up, but incur a loss if the index goes down. This is referred to as going long.

Index Trading Example:

See the example below, using an index, to see how it works:

You decide to buy 20 FTSE100 CFDs when the market is at 4548 - 4550:

Price of FTSE 100 CFD £4,550
Number of CFDs 20
Notional value of CFDs £91,000
Commission £15
Margin Requirement (5%) £4,550
Finance*: £11.22/day [(4.5/100 x 91,000)/365].

* When you enter a long (buy) position using a CFD you have to pay a daily financing charge usually based on LIBOR and the closing price of the instrument (in this case the FTSE). The usual rate is LIBOR plus 2.5% so assuming LIBOR stands at 2% on a given day, the rate would be 4.5%.

So what happens if the price moves up?

8 days later the FTSE100 CFD is trading at 4606 4608 so you decide to sell your 20 CFDs and take your profit:

Price of FTSE 100 CFD £4,606
Number of CFDs 20
Commission £15
Closing Value £92,120
Opening Value £91,000
Profit on trade £1,120
Commission (£15)
8 day financing at £11.22/day £89.76
Overall profit on trade = £1,000.24

What happens if the price moves down?

8 days later the FTSE100 CFD is trading at 4522 - 4524 you decide to sell your 20 CFDs and cut your loss:

Price of FTSE 100 CFD £4,522
Number of CFDs 20
Commission £15
Closing Value £90,440
Opening Value £91,000
Loss on trade £560
Commission (£15)
8 day financing at £11.22/day £89.76
Overall loss on trade = £679.76

Are Index CFDs Commission Free?

We know that in life there is no such thing as a free lunch and this applies to trading fees as well. Different providers have different charging structures. Commission for Index CFDs may consist of a flat charge or the fee could be percentage based or may be charged indirectly in the form of a wider bid-offer spread than the market.

Some brokers may not charge you a direct commission when trading Index CFDs but they are still charging indirectly in the form of the bid-offer spread. The bid-offer spread amounts to the difference between the first buyer and the first seller [FTSE 100: 4548 - 4550]. If we look at our FTSE 100 example for example, the spread amounts to 2 points with the first buyer at 4548 and the first seller at 4550. Thus, if you traded at £1 per point and bought and sold immediately at 4548 and 4550 respectively - this would result in a two pound loss (which is in effect your brokerage fee). Thus if we traded 20 contracts with a 2 pt spread the real brokerage commission would amount to £50 to buy and £50 to sell making it a £100 round-trip. In our example above the commission charged amounts to a flat charge of £15 plus a 2 point spread.