Examples of CFD Trading
Here's a full walkthrough of an example CFD transaction we've put together, to give you a flavour of the nature of the costs and considerations involved, along with a couple more worked examples below to help make planning your CFD investment strategy easier.
Opening Price
Say you identified an opportunity in XCorp shares and you want to take a long position. The shares are priced at 118p each and you have £5000 cash in your portfolio to invest. CFDs will be priced at the same rate as the price in the underlying cash market. In opening the trade you decide to invest £500 in XCorp CFDs, which is equal to a 5% margin requirement for the transaction. The total size of the position would be, therefore £10,000 (when 95% of the transaction is leveraged funded).
Commission
At this stage, the broker will charge a commission portion on the transaction which covers the costs of their service. In our example, the commission rate applicable is 0.1%, although this figure naturally varies between different brokers, markets and CFDs. For your XCorp position, the commission payable would be £10 (£10,000 x 0.1%).
Interest
Your XCorp position is growing well, although the trading day is almost through. You decide to hold the position overnight, which incurs a financing charge to pay for the leverage sums tied up in the position. Assume XCorp shares closed up at 121p, and the rate of interest charged by the broker is 5%. The daily financing cost for the position is calculated by working out the total value of the position at market close (£10,254) and charging interest at the applicable annual rate then divided by 365. In this instance, the interest cost would amount to around £1.40.
Closing Price
At around lunchtime on day two, you decide XCorp shares have peaked in value, and it's time for you to close out and bank a profit. Shares have risen to 124p, and your position is now worth £10,508. At the closing price, it is possible to work out the overall outcome of the trade by deducting the opening price and the leverage proportion along with any other costs to calculate profit.
Closing level - opening level =gross: £10,508-£10,000 = £508.
Less Commission + Interest = £508.00 - £11.40: = £496.60 profit.
Further Example
Airlines look set to be affected by an announcement of a new environmental duty. Shares in FlyA, an already underperforming company could be badly affected. You take a short position with shares valued at 82p worth £12,000 total transaction size.
The shares position closes at 81p on day 1 and 78p on day 2, at the end of which the position is closed.
Opening price: 82p
Total CFDs: 14634
Margin paid: £600
Commission: @0.1% = £12
Interest: Day 1 paid for short positions at 1% = ((14634 x 81p) x 1%)/365 = £0.32, Day 2 = ((14634 x 78p) x 1%)/365 = £0.31
Closing price: 78p
Closing position value: £11,414.52
Profit = Opening level less closing level less interest less commission = £12,000 - £11,414.52 - £12 - £0.63 = £572.85
