CFD trading examples

Let’s take a look at a long and a short CFD trading scenario

Going short

With CFD trading your profit or loss is determined by the difference between the buy and the sell price of the financial instrument that you are trading. Imagine this scenario about a fictional oil company called North Sea Oil PLC (NSO):

Placing a trade

North Sea Oil Plc is trading at 1,599/1,600p. You think that the price is going to fall in value so you decide to go short and sell 1,000 NSO CFDs at 1,599. 1000 CFDs at 1599 gives you a position size of £15,999 (1,000 x 1,599p = £15,999). As the margin requirement for this instrument is 5%, only £799.95 (£15,999 x 5% = £799.95) is allocated from your trading account as an initial margin.

Closing your position

Let’s say the market falls 50 points to 1,549/1,550. You decide to close out your position to realise a profit, so you buy 1,000 NSO CFDs at 1,550 to close out your NSO position and you make £490 (1000 x (1599 – 1550) profit, less any holding costs.

Going long

Placing a trade

North Sea Oil Plc is trading at 1,599/1,600p. You think the price is going to rise in value so you decide to go long and buy 1000 NSO CFDs at 1,600p. This gives you a position size of £16,000 (1000 x 1,600p = £16,000).

Margin

The margin requirement with CMC Markets for NSO is 5%, therefore £800 (£16,000 x 5% = £800) will be allocated to this trade from your account as initial margin. Remember, if the share price moves against you, it is possible to lose more than this £800 initial margin.The margin requirement with CMC Markets for NSO is 5%, therefore £800 (£16,000 x 5% = £800) will be allocated to this trade from your account as initial margin. Remember, if the share price moves against you, it is possible to lose more than this £800 initial margin.

Commission charge

Equity CFDs attract a commission charge of 8 basis points. One basis point is 0.01 of a percentage point. To determine how much commission you would pay, you multiply your position size by the commission charge. In this example the charge is £12.80 (£16,000 x 0.08%=£12.80).

Your open position

You now hold a position of 1,000 NSO CFDs with a value of £16,000. Later that day you see that NSO has risen to 1,625/1,626

Closing the position

You choose to sell at 1,625p to realise your profit. You originally bought at 1,600p and sold at 1,625p which means NSO rose by 25 pence. 25 pence x 1,000 CFDs = £250 profit. The commission charge of 8 basis points will also apply to the closure of the trade, equalling £13.00.

Your profit and loss

After deducting the commission charges from the total revenue you realise a profit of £224.20. Had the market moved against you (the share price of NSO had fallen in value) by 25 points you would have lost £250 plus commission.