Trading Shares CFDs

CFDs represent a contract between a buyer and a seller to settle the difference between the opening and the closing price of a share or other security.

Here is a worked example of a series of CFD trades in a stock called XYZ Pty Ltd, all executed within the same day.

The initial outlay

  • XYZ Ltd shares are trading at $10 each.
  • You buy 1,000 CFDs in those shares.
  • Your initial margin requirement is $500 (being 5% of the theoretical purchase price of 1,000 @ $10 per share).
  • You pay brokerage of $12.50 (or 0.125% which is a little bit more than the more standard 0.10% most providers charge these days).
 

What happens if the share price rises to $11?

-> You sell 1,000 CFDs in XYZ at $11 each.
-> You are paid $1 for each CFD that is, the difference between the buy price and the sell price of the underlying share.
-> Your gross profit is $1,000.
-> You pay brokerage on the sale of $13.75 ($11,000 x 0.125%).
-> Your net profit is $973.75 (or $1,000 minus $12.50 in purchase brokerage and $13.75 in sale brokerage).

What happens if the share price drops to $9?

-> You sell 1,000 CFDs in XYZ at $9 each.
-> You pay $1 for each CFD that is, the difference between the buy price and the sell price of the underlying share.
-> Your net loss is $1,025 (or $1,000 plus $12.50 in purchase brokerage and $12.50 in sale brokerage).

What about Corporate Actions?

In a nutshell contracts for difference mirror any corporate actions except that they don't entitle you to franking credits or voting rights normally linked with owning the underlying shares.

In the case of dividends payments CFD holders usually receive cash dividends if they hold a long CFD position on the ex-dividend date. Should you hold a short position, you will have to make a cash payment equivalent to the value of the dividends.

Other corporate actions such as buybacks, takeovers, bonus issues and rights issues during the holding period of a CFD are also taken into account and mirrored in your CFD holding. So as you can see although you don't actually own the underlying asset, you still stand to gain most of the benefits as if you did.

Comparison to Shares Trading

Let's compare how a typical shares trade compares to a CFD deal at a 0.1% standard commission -:

Opening your Share CFD Position:


CFDs - Leveraged Trade Traditional Trade With No Leverage
Buy Price $5 Buy Price $5
Initial Outlay (3% margin) $3000 Initial Outlay $100,000
Commission charge (to buy) at 0.10% $100 Commission charge (to buy) $310
Total Outlay $3066 Total Outlay $100,310

Closing your Share CFD Position:


CFDs - Leveraged Trade Traditional Trade With No Leverage
Sell Price $5.20 Sell Price $5.20
Gross profit/loss $4000 Gross profit/loss $4000
Total Commission charges (to buy & sell) $200 Total Commission charges (to buy & sell) $620
Overnight financing: 1 day $20.08 Overnight financing: 1 day Zero
GST Zero GST $50
Net profit/loss $3779.92 Net profit/loss $3450
Return On Investment (ROI) 126% Return On Investment (ROI) 3.38%

 ...Continues here - Trading Blue Chip Stocks

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