Going long’ is simply buying a CFD position to profit from a price increase. Very similar to traditional trading in that the idea is to buy low and sell high. The difference between the entry price and the exit price is the profit or loss that is made on the CFD trade.
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The example below of a long trade is compared to a traditional equity trade. The reason for this is to illustrate the power of leverage for a CFD trader over a traditional share trade. Also to illustrate that minimal capital is required to gain similar profits and how the CFD trader Return on Investment (ROI) is far greater than the share trade. This is simply because the CFD trader only needs a fraction of the capital to take the trade.
| CFDs | Shares | |||
|---|---|---|---|---|
| DAY 1 | Amy | Steve | ||
| Opening Purchase Price VOD | £3.50 | £3.50 | ||
| Buy Quantity | 5000 | 5000 | ||
| Commission Paid | 0.10% | £17.50 | £12.50 | |
| Total Exposure | £17,500 | £17,500 | ||
| CFD Margin – 5% | 5% | £875 | ||
| Initial Outlay | £892.50 | £17,512.50 | ||
| DAY 2 | ||||
| Closing VOD Position | ||||
| Closing Price | £3.60 | £3.60 | ||
| Quantity sold to close position | 5000 | 5000 | ||
| Position Closed | £18,000 | £18,000 | ||
| Commission | 0.10% | £18.00 | £12.50 | |
| Financing charged at 4.5% p.a based on FPM rate of 2.5% ** | £2.22 | £0 | ||
| £3.55 x 5000 x (FPM Rate + 2%) / 360 | ||||
| Total outlay | £912.72 | £17,525 | ||
| Gross Profit | £500.00 | £500.00 | ||
| Net Profit (Gross minus trading cost) | £462.28 | £475 | ||
| Return on Investment | 50.65% | 2.71% |
** Financing is calculated at the closing market price of £3.55
NOTE: If the price of VOD had fallen by £0.10 Amy would have incurred a loss of £537.22
Please not that in this example we have used a standard share trading commission of £12.50. In many cases share trading with other providers commissions will vary.
Short Trading Examples
‘Going short’ is simply opening a short or ‘sell’ CFD position to profit from a potential share price decline. Short selling is the opposite to going long in that the trader wants to sell high and then buy low to achieve a profit. The difference between the opening and closing price is the profit or loss the trader incurs. Leverage and commissions are exactly the same. A short position held overnight receives financing rather than paying financing.
Amy believes British Airways (BAY) will release lower than expected profit figures and she expects the share price to drop in response. Amy places a sell order for 10,000 BAY shares at the current market price of £2.50. The margin rate on BAY is 5%, therefore £1,250 is required as margin to open the position. The trade is placed and Amy holds a short BAY CFD position. When opening a short position you have received a cash payment for the full value of your short position and receive interest on this amount at the online trading platforms rate minus 2% pa. The overnight interest rate is calculated by dividing the per annum applicable interest rate payable by 360 (Days per year).
Please note we have not compared this trade to an identical equity trade due to the limitations with short selling physical shares.
| Opening Short British Airways Position | |
|---|---|
| Price | £2.50 |
| CFDs sold for £25,000 exposure | 10,000 |
| Total Exposure | £25,000 |
| Commission (0.10%) | £25.00 |
| Margin Requirement | £1,250 |
| Initial Outlay | £1,275.00 |
| Closing Short British Airways Position | |
| Price | £2.40 |
| CFDs bought to close position | 10,000 |
| Position size closed | £24,000 |
| Commission | £24.00 |
| Total outlay | £1,324 |
| Financing Received at 0.5%pa based on FPM rate of 2.5% £2.45 x 10,000 x (FPM – 2%) / 360 ** | £0.34 |
| Gross Profit | £1,000 |
| Net Profit (Gross minus trading cost + financing received) | £951.34 |
| Return on outlay | 76.1% |