CFD Trading Examples: Workings

Below are a series of examples designed to assist you grasp the fundamentals of CFDs.

1. Example to show CFD Trading Principle

You open your trading account with $10 000. Your trade size is $10 000 per trade and with your account leveraged by 10:1 you're entitled a maximum of 10 positions at any given time.

Let’s say that you bought CFDs at a price of $5.00.

With a trade size of $10 000 the number of CFDs bought would have been 2000, that is 10000/5.00 = 2000.

So we place our trade and the value of our CFD climbs to $5.50 at which point we decide to close our position.

The difference in asset value is $5.50 - $5.00 = $0.50, which gives as $0.50 profit per CFD of which we have 2000.

CFD Trading Basics
Open CFD value (price you bought shares) :  $
Total CFDs purchased (number of shares) :  
Closing CFD value (price you sold shares):  $
Profit:   $
Return on investment (ROI):   %

This example takes a very simplistic view but shows that CFD trading is based on the margin in price movement of the underlying asset.

2. Example to show how Gearing or Leveraged Trading Works

CFDs make use of the 'gearing' or 'leverage' principle. This enables investors to increase their percentage return and losses, on investments. You get leverage when you only have to put down a small amount of money to control a much bigger position.

Let's assume that you have chosen a broker that gives you a 100:1 leverage on your trades and you decide to buy currency with your CFDs account. Your strategy is to go long on the US dollar against the Swiss franc, thus profiting on any rise in value of USD against CHF. You execute your trade buying $100,000 USD (selling 124,770 CHK) with an initial margin deposit of $1,000 and at a rate of $1 to 1.2477 francs.

The value of the dollar does in fact increase against the Swiss franc to 1.2497 and you choose to sell your dollars and close out your position.

You originally paid (sold) 124,770 CHF and your position closed at 124,970, which is a profit of 200 CHF or 160.04 USD.

That is a 16% return on investment, which without leveraging would have amounted to less than 1%.

Leveraged Trading
USD   CHF  
Exchange rate:  $  $
Not Leveraged
 
Leveraged 100:1  
Total amount USD buy:  $  $
Total amount CHF sell:  $  $
CHF value when position closed:  $  
Profit CHF:   $  $
Profit USD:   $  $
Return on investment (ROI):   %  %


Leveraging works both ways. As easy as it is to increase your ROI, it is to lose your entire investment should the market go against you. It is recommended that you should approach CFDs with caution and ensure that you use a well practiced and proven trading strategy.