> > Index CFDs

# Index CFDs

Written by

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.

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.