What is a CFD - Trading examples
STOCK-CFD's
A CFD (Contract For Difference) is a product that enables you to take advantage of stock price's movement both up and down. When trading CFD's you don't own the actual stock - instead you own a contract giving you the right to price changes and dividends. CFD's are traded on margin which means that your position can be several times bigger than your own capital if you like. The Margin requirement of the CFD's offered on our platform are between 15 - 25%. For a list of exact margin requirements click here.
CFD's can be bought and sold just like stocks, but it is also possible to sell CFD's that you do not own which is is called "shorting". The profit / loss because of changes in the stock price are exactly the same when trading CFD's as if the trader would have traded the underlying stocks. The biggest differences between trading stocks outright and trading stocks via CFD is the possibility to use leverage and being able to short easily.
A trader who expects the price of a stock to rise can establish a so called long-position by buying the CFD's for the stock with the goal of selling them for a higher price in the future. A financing cost is charged for long-positions held overnight- this is comparable to the trader having bought the underlying stock position with borrowed money. You can see the current financing cost in our current price list.
A trader who expects the price of a stock to fall can take a so called short-position by selling the stock's CFD's without owning them from before with the goal of buying them for a lower price in the future. A short position held overnight usually pays financing revenue to the trader. You can see the current financing revenue in our current price list.
SCENARIO: You expect the price to rise
The stock XYZ is trading at 10,00 – 10,05. The margin requirement for XYZ CFD is 15% and Euribor is 5%.
- You buy 1000 XYZ CFD´s at 10,05 – this position requires 1 507,50 EUR as margin (15% of 10 050,00 EUR)
- 3 days later XYZ trades at 10,50-10,55 – you sell your 1 000 XYZ CFD´s at 10,50. You have made a trading profit of 450 EUR.
- You kept the position for 3 days which means you pay 3 days financing cost (Euribor + 2,5 %) for the value of the underlying position (10 050,00 EUR * 0,075/360 days * 3 days = 6,28 EUR).
The commission charged is 0,08 % of the underlying value of the buy and sell (0,0008*10.050 EUR = 8,04 EUR AND 0,0008 * 10 500 EUR = 8,40 EUR). The total commission is thus 8,04 EUR + 8,40 EUR = 16,44 EUR.
- The net profit of the trade is 450 Euros minus financing costs and commission i.e. your net profit is 427,28 and return on the capital allocated (1507.50 EUR) is 28,4 %.
If the stock price would have moved the other way the loss would have been 450 EUR + 22,72 EUR i.e. 472,72 EUR.
SCENARIO: You expect the price to go lower
The stock XYZ is trading at 10,00 – 10,05. The margin requirement for XYZ CFD is 15% and Euribor is 5%.
- You sell 1000 XYZ CFD´s at 10,00 – this position requires 1 500 EUR as margin (15% of 10 000,00 EUR)
- 3 days later XYZ trades at 9,45-9,50 – you buy back your 1 000 CFD´s at 9,50. You have made a trading profit of 500 EUR.
- You kept the short position for 3 days. Since you had a short CFD position you will receive financing revenue (Euribor – 3 %) for the value of the underlying position (10 000 * 0,02/360 days * 3 days = 1,66 EUR).
The commission for the trade is 0,08% of the underlying positions value (0,0008 * 10 000 EUR = 8,00 EUR AND 0,0008 * 9 500 EUR = 7,60 EUR). The total commission is 8,00 EUR + 7,60 EUR = 15,60 EUR.
- The net profit of the trade is 500 EUR minus commission plus financing revenue i.e. your net profit is 486,06 EUR. Return on the allocated capital (1 500 EUR) is 32,5%.
If the stock price would have moved the other way the loss would have been 500 EUR + 15.60 EUR -1,66 EUR i.e. 513.,94 EUR.
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