CFD Trading Example
CFD trading is straightforward – if you think a market will rise you buy (go ‘long’), and if you think it will fall you sell (go ‘short’).
As with traditional share dealing, CFD prices are quoted as a Bid (the price you can sell at) and an Offer (the price you can buy at). With CFD trading you buy a CFD based on a certain amount of the underlying asset.
Imagine the physical purchase of 1,000 British Telecom shares at 200p each. By investing the same amount of capital, you could buy (go ‘long’) a CFD representing 10,000 shares.
| Action | Buying shares | Buying a CFD |
|---|---|---|
| Opening Value | £2,000 | £20,000 |
| Commission (0.5%) | £10 | £100 |
| Stamp Duty (0.5% on shares) |
£10 | £0 |
| Deposit Required (10% for CFD) |
£2,000 | £2,000 |
After 10 days, you sell at a profit. Your sale price is 220p per share. Your deposit is returned to you, together with your profit.
| Action | Selling shares | Selling a CFD |
|---|---|---|
| Closing Value | £2,200 | £22,000 |
| Commission (0.5%) | £11 | £110 |
| Interest Charges (including financing @ libor + 2% = 6% pa on CFD) |
Nil | £37.40 |
| Net Profit | £169 | £1,752.60 |
| % Return On Equity | 8.5% | 87.6% |
This is obviously a favourable outcome. If British Telecom shares had dropped, the leverage effect would have magnified your losses.
The example above assumes a commission rate of 0.5%. Commission rates range from 0.2% to 0.5% depending on account size.
CFD Trading benefits.
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