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CFD Example

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How a CFD Works


Trading Short (Selling)
Opening a short position
 
Its the second week of February and crude oil prices are still rising, you believe that  British Airways share price may have a negative correlation to the crude oil prices and that its share price will fall.
British Airways is trading at 271p/271.50p. You decide to sell 20,000 CFDs in British Airways at the bid price of 271p.
 
If you trade normal shares this would not be possible. With CFDs you can.
Furthermore the value of holding 20,000 shares when normal share dealing would be 
271p x 20,000 = 54,200.
With a CFD you only allocate a deposit of 10% or 5,420 and you can sell a CFD
 
Closing a short position
 
At the end of April your judgement was correct and British Airways share price has fallen to 238.50/238.75. You decide to buy 20,000 CFD Shares at the offer price of 238.75, closing your short position.
 
Your profit on this transaction:
Opening Profit    271p
Closing profit      238.75p
Difference =       32.25p
Profit on Trade:  32.25 x 20,000 = 6,450*
 
Trading Long (Buying)
Opening a long position
 
In Novemeber you decide you want to buy shares in TESCO and is looking a good price at 307p/307.25p - So you buy 10,000 CFDs at the offer price of 307.25p.
 
You don't need to allocate the full value of the shares
307.25p x 10,000 = 30,725
You only need to allocate a deposit of 10% or 3,725
 
Closing a long position 
 
By the middle of December you have been quoted a price of 330.25p/330.50p in the market. You decide to sell 10,000 shares at the bid price of 330.25p
 
 
Your profit on this transaction:
Closing Profit    330.25p
Opening Profit  307.25p
Difference =       23p
Profit on trade 23p x 10,000 shares = 2,300*
 
* Commissions are not included

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