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    An Easy to Follow Example of CFD Trading

    Contract for difference trading (CFD trading) is a common type of derivative trading. When CFD trading, you take a position on the rising or falling prices of global financial markets such as shares, commodities,  indices, currencies etc. In other words, you are essentially betting on whether the value of an asset (such as a share) is going to rise or fall in the future compared to its value when the contract was taken out.

    How do CFDs work?

    When you buy or sell a CFD, you exchange the difference in the price of a market from when you open your position to when you close it. If you go long, you gain the difference if the asset increases in value and lose the difference if it decreases in value.  If you go short, you gain the difference if the asset decreases in value and lose the difference if it increases in value.

    CFDs are popular with investors for a number of reasons:

    - You have the flexibility to trade on falling markets (short selling) or rising markets (long selling)

    - You can invest a small amount of money to control a much larger value position

    - You can go short to offset any potential loss in the value of your physical investments

    We’ve created this example of CFD trading to help you see how it works in practice.

    CFD trading example

    Rebecca has been researching XYZ company and thinks that its share price is overvalued. She decides to take a short position on CFDs over XYZ shares (i.e. to bet that XYZ share prices will fall).

     

    The current price of a CFD over XYZ shares offered by Rebecca’s chosen CFD provider is $4. Rebecca places an order to buy 2,000 XYZ CFDs and her order is accepted by the provider at $4 per CFD.

     

    Thus, the contract value is $4 x 2,000 = $8,000.

     

    The return on Rebecca’s investment depends on what happens to the price of XYZ shares. Here’s how different outcomes would affect Rebecca’s return*:

     

    If the price of XYZ shares

    to

    Rebecca would gain/lose

    Falls by 10%

    $3.60

    $800

    Falls by 20%

    $3.20

    $1,600

    Stays the same

    $4.00

    $0

    Rises by 5%

    $4.20

    -$400

    Rises by 15%

    $4.60

    -$1,200

     

    *Gains/losses and rate of return don’t take into account any potential commission or fees charged by the CFD provider.

    Because Rebecca decided to go short on CFDs, she stands to make a gain if the price on XYZ shares falls rather than rises.

    Taking the best approach to CFD trading comes down to understanding market trends and opportunities. Register for our webinars to get access to the latest trading strategies and market insights.