CFD Trading Examples

Going long on a CFD position is akin to buying a share or index on margin, however a great feature of trading CFDs is that you can also make money if you think that a share price or index is going to fall by taking a short position.

Guide to Trading CFDs: More CFD Trading Examples

CFD Trading Example 1 – Long Position in Tesco

Trading Example

It is early February and you decide Tesco is looking cheap. The share is quoted at 246.5/248.0p in the market, and you buy 10,000 shares as a CFD at 248p, the offer price. The commission on the transaction is 0.10% or £24.8 (10,000 shares x 248p x 0.10%). There is no stamp duty to pay.

While your position remains open, your account is debited to reflect interest adjustments and credited to reflect any dividends.

Interest Adjustments

The interest cost of your position is calculated daily, by applying the applicable interest rate to the daily closing value of the position. The daily closing value is the number of shares multiplied by the closing price.

In this example, the applicable interest rate might be 6.5% and the closing price of the shares on a particular day might be 250p. The closing value of the position would be £25,000 (i.e. 10,000 shares x 250p).

So the interest cost for the position for this particular day would be £4.45 (i.e. £25,000 x 6.5% / 365).

Each day’s interest calculation will be different. Interest adjustments are calculated daily and posted to your account on a weekly basis.

Dividend Adjustment

In early March your position is still open at the time of the Tesco ex-dividend date. The amount of the net dividend is 6p per share and this is credited to your account. The adjustment is calculated as follows:

10,000 shares x 6p = £600.

Closing the Position

By late March Tesco has risen to 260/262p in the market and you decide to take your profit. You sell 10,000 shares at 260p, the bid price. The commission on the transaction is 0.10% or £26 (10,000 shares x 260p x 0.10%).

Your profit on the Trade is calculated as follows:

Calculating the Overall Result

To calculate the overall profit on the transaction you also have to take account of the commission you have paid and the interest and dividend adjustments that have been credited or debited. In this example, you might have held the position for 50 days, at a total interest cost of, say, £222. You have received a dividend adjustment of £600.

So your total profit is calculated as follows:

CFD Trading Example 2 – Short Position in Abbey National

For the active trader, stock markets have one major disadvantage: it is not easy to go short. When you trade Contracts For Difference, it is as easy to go short as to go long. This example shows how you can use a CFD to sell a share short. Going short means selling something at a high price, with a perspective to buying back the stock or index at a lower price and taking a profit.

Follow the example below, using a short position in the share price of Abbey National, to see how it works:

Opening the Position

It is June and you think Abbey National stock is about to fall. The share is quoted in the market at 548/550p. You sell 5000 shares as a CFD at 548p, the bid price. The commission on the transaction is 0.1% or £27.4 (5000 shares x 548p x 0.5%). There is no stamp duty to pay.

Because you have taken a short position, your account is credited to reflect interest adjustments and debited to reflect any dividends.

Interest Adjustments

The interest credit on your position is calculated daily, by applying the applicable interest rate to the daily closing value of the position. In this example, the applicable interest rate might be 3 % and the closing price of the shares on a particular day might be 545p, giving a closing value of £27,250 (i.e. 5000 shares x 545p).

So the interest credit for the position for this particular day would be £2.24 (i.e. £27,250 x 3% / 365).

Interest adjustments are calculated daily and posted to your account on a weekly basis, or more frequently on request.

Dividend Adjustment

In July your position is still open at the time of the Abbey National ex-dividend date. The amount of the net dividend is 7p per share and this is debited from your account. The adjustment is calculated as follows:

5000 shares x 7p = £350

Closing the Position

By early August, Abbey National stock has risen to 560/562p in the market and you decide to cut your loss and close the position. You buy 5000 shares at 562p, the offer price. The commission on the transaction is 0.1% or £28.1 (5000 shares x 562p x 0.1%).

Your loss on the trade is calculated as follows:

Calculating the Overall Result

To calculate the overall loss on the transaction you also have to take account of the commission you have paid and the interest and dividend adjustments. In this example, you might have held the position for 66 days, earning a total interest credit of, say, £192. You have been debited a dividend adjustment of £350.

The overall result of the trade is a loss, calculated as follows: