CFD Trading Examples

Going long on a CFD position is akin to buying a share or index on margin, however a great feature of trading CFDs is that you can also make money if you think that a share price or index is going to fall by taking a short position.

CFD Trading – Contract for Difference Examples

The table below illustrates an example of an opening CFD trade in British Airways at 228p. It highlights the difference between an investor buying a position in shares and an investor buying the same size position using CFDs

Trade 1: Result Profit

Opening Trade Buying Shares Buying a CFD
Price of British Airways 228p 228p
Number of Shares 5000 5000
Value of Position 11400 11400
Stamp Duty (0.5%) 57 0
Commission 114 (1%) 11.4 (0.1%)
Deposit Required 11400 1140

After 5 days both investors sell their British Airways shares for a profit.

Closing Trade Selling Shares Selling a CFD
Price of British Airways 250p 250p
Number of Shares 5000 5000
Value of Position 12500 12500
Commission 125 12.5
Financing Charges* NIL 4.68
Net Profit 804 1071.42
Return on Equity Deposit 7% 93.98%

 

 

Trade 2: Long Trade with Net Loss

After 5 days the position hits a stop loss which was placed at 218p, closing the British Airways position at a loss in the process.

Closing Trade Selling Shares Selling a CFD
Price of British Airways 218p 218p
Number of Shares 5000 5000
Value of Position 10900 10900
Commission 109 10.9
Financing Charges* NIL 4.68
Net Loss 780 526.98
Return on Equity Deposit -6.84% -46.22%

*position held over 5 nights

CFD trading 'buy' (long) positions held overnight are subject an overnight financing daily (small) fee. For long positions the interest is debited and for short positions the interest is credited. In this specific example, the CFD investor has paid a standard financing charge of 4.68 for holding the position. Interest is charged on an overnight basis and is based on the full overall contract size [in this case 11,400 x 3% (LIBOR + 2.50%) divided by 365 x the amount of days the position is open. 5 days = 4.68.] Commission is charged as a percentage of the total value of a position. Note that long positions held for long periods of time can reduce returns, in some cases rendering the gearing obtained as comparable to buying a contract or shares completely in the market. CFDs give investors exposure to changes in share prices but cannot result in delivery of actual shares by or to the investor nor do they confer ownership rights. This is because through holding a CFD contract the the investor does not own the underlying shares and, as such, does not have any voting rights.

Note that the percentage return will depend on the extent of leverage used; high leverage can result in both bigger profits and larger losses. Extremely high returns normally require extreme leverage, which can easily result in extreme losses if the trader is on the wrong side of the trade and does not exit the position quickly.


Guide to Trading CFDs: More CFD Trading Examples


CFD Trading Example 1 - Long Position in Tesco


Trading Example

It is early February and you decide Tesco is looking cheap. The share is quoted at 246.5/248.0p in the market, and you buy 10,000 shares as a CFD at 248p, the offer price. The commission on the transaction is 0.10% or £24.8 (10,000 shares x 248p x 0.10%). There is no stamp duty to pay.

While your position remains open, your account is debited to reflect interest adjustments and credited to reflect any dividends.

Interest Adjustments

The interest cost of your position is calculated daily, by applying the applicable interest rate to the daily closing value of the position. The daily closing value is the number of shares multiplied by the closing price.

In this example, the applicable interest rate might be 6.5% and the closing price of the shares on a particular day might be 250p. The closing value of the position would be £25,000 (i.e. 10,000 shares x 250p).

So the interest cost for the position for this particular day would be £4.45 (i.e. £25,000 x 6.5% / 365).

Each day's interest calculation will be different. Interest adjustments are calculated daily and posted to your account on a weekly basis.

Dividend Adjustment

In early March your position is still open at the time of the Tesco ex-dividend date. The amount of the net dividend is 6p per share and this is credited to your account. The adjustment is calculated as follows:

10,000 shares x 6p = £600.

Closing the Position

By late March Tesco has risen to 260/262p in the market and you decide to take your profit. You sell 10,000 shares at 260p, the bid price. The commission on the transaction is 0.10% or £26 (10,000 shares x 260p x 0.10%).

Your profit on the Trade is calculated as follows:

Profit on trade
Closing level 260p
Opening level 248p
Difference 12p
Profit on trade: 12p x 10,000 = £1200

Calculating the Overall Result

To calculate the overall profit on the transaction you also have to take account of the commission you have paid and the interest and dividend adjustments that have been credited or debited. In this example, you might have held the position for 50 days, at a total interest cost of, say, £222. You have received a dividend adjustment of £600.

So your total profit is calculated as follows:

Overall result
Profit on trade £1200
Commission (£50.8)
Interest adjustment (£222)
Dividend adjustment £600
Overall profit on trade = £1527.20

CFD Trading Example 2 - Short Position in Abbey National

For the active trader, stock markets have one major disadvantage: it is not easy to go short. When you trade Contracts For Difference, it is as easy to go short as to go long. This example shows how you can use a CFD to sell a share short. Going short means selling something at a high price, with a perspective to buying back the stock or index at a lower price and taking a profit.

Follow the example below, using a short position in the share price of Abbey National, to see how it works:

Opening the Position

It is June and you think Abbey National stock is about to fall. The share is quoted in the market at 548/550p. You sell 5000 shares as a CFD at 548p, the bid price. The commission on the transaction is 0.1% or £27.4 (5000 shares x 548p x 0.5%). There is no stamp duty to pay.

Because you have taken a short position, your account is credited to reflect interest adjustments and debited to reflect any dividends.

Interest Adjustments

The interest credit on your position is calculated daily, by applying the applicable interest rate to the daily closing value of the position. In this example, the applicable interest rate might be 3 % and the closing price of the shares on a particular day might be 545p, giving a closing value of £27,250 (i.e. 5000 shares x 545p).

So the interest credit for the position for this particular day would be £2.24 (i.e. £27,250 x 3% / 365).

Interest adjustments are calculated daily and posted to your account on a weekly basis, or more frequently on request.

Dividend Adjustment

In July your position is still open at the time of the Abbey National ex-dividend date. The amount of the net dividend is 7p per share and this is debited from your account. The adjustment is calculated as follows:

5000 shares x 7p = £350

Closing the Position

By early August, Abbey National stock has risen to 560/562p in the market and you decide to cut your loss and close the position. You buy 5000 shares at 562p, the offer price. The commission on the transaction is 0.1% or £28.1 (5000 shares x 562p x 0.1%).

Your loss on the trade is calculated as follows:

Loss on trade
Closing level 562p
Opening level 548p
Difference 14p
Loss on trade: 14p x 5000 = £700

Calculating the Overall Result

To calculate the overall loss on the transaction you also have to take account of the commission you have paid and the interest and dividend adjustments. In this example, you might have held the position for 66 days, earning a total interest credit of, say, £192. You have been debited a dividend adjustment of £350.

The overall result of the trade is a loss, calculated as follows:

Overall result
Loss on trade (£700)
Commission (£55.5)
Interest adjustment £192
Dividend adjustment (£350)
Overall loss on trade = (£913.5)