CFDs Explained

CFDs work in a very similar way to Spread Betting and are also a flexible and cost effective way to trade a wide range of financial markets. CFD means Contract for Difference and just like other investments your profit or loss is determined by the difference between your buy price and your sell price.

The best way to explain how CFDs work is through an example:

1. ABC Corp is trading at 1599/1600p and you think the price is going to rise in value.

2. You decide to go long so you buy ABC corp at 1600p

3. You decide to trade 1000 shares. You buy 1000 CFDs at 1600p giving you a position size of £16000. 1000 x 1600p = £16000

4. 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. £16000 x 0.08%=£12.80

5. You now hold a position of 1000 CFDs with a value of £16000

6. Your margin requirement with CMC Markets for ABC Corp is 5% therefore £800 will be allocated from your account against this trade as initial margin. Remember if the share price moves against you, it is possible to lose more than this £800 initial margin.

7. Two days later you see that ABC Corp has risen to 1625/1626

8. Therefore you choose to sell at 1625p and realise your profit. The commission charge of 8 basis points will also apply to the closure of the trade, equaling £13.00

9. You bought at 1600p and sold at 1625p which means ABC Corp rose by 25 pence. 25pence x 1000 CFDs = £250 revenue.

10. You held the position for two days which means you incurred two nights financing charge. This equals £16000 (value of the position) x Libor* + 3%** (which in this instance = 8%) /360 (number of days in the year) x 2 (number of days position is held)
    = £7.01

11. Therefore you deduct the financing and commission charges from the total revenue and realise a profit of £217.19.

*Rates based on daily cash rate, this rate is subject to daily market flucuations
** CMC Markets reserve the right to amend this rate with prior notice.

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