CFDs have a wide range of trading applications, including indices and forex pairs. In this example, we’ll look at a hypothetical CFD trade based on shares.
Let’s say you believe the value of shares in a company you’ve been studying for the past couple of weeks is set to rise. The shares are currently trading at 298.9/299p, so you buy 10,000 CFDs at the buy price of 299p. The opening value of the trade will therefore be £29,900 (10,000 x 299p).
Opening the trade requires a margin deposit, which will typically stand at around 10%, so in this example, you’ll deposit £2,990. The share price does indeed rise, so you close your position at the sell price of 303.5p. The market has moved by 4.5 pips, meaning you are selling 10,000 CFDs at the current market price of 303.5p, giving you a profit of £400 (30,350 – 29,900).
Now, depending on your broker, you may well have to pay commission on both the opening and closure of your trade. If this is the case, and supposing your broker’s commission is 0.15%, you will pay £44.85 to open and £45.53 to exit. It’s worth noting your broker’s commission before committing to a CFD trade because it can quickly eat into your profits, so take some time to shop around and reduce your trading costs where possible.
