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Example 1 - an Equity based CFD tradeIn this example we show an equity based CFD trade. The share price of Apple Inc is $194.38. We believe that the share price will rise and so decide to take a long CFD position. Our CFD Provider is quoting a price of $194.36 bid and $194.42 offer.
Step 1 Opening a position
Buy 100 Apple CFDs at offer price 100 x $194.42 = $19,442.00
Margin requirement is open position x margin percentage. Typical margin for equities is 3%-15% depending on the liquidity of the underlying instrument. In our example Apple CFDs require margin of 5%. $19,442.00 x 0.05 = $972.10
You get charged commission of 0.1% on this transaction $19,442.00 x 0.001 = $19.44
Step 2 Overnight Financing
To hold this position a financing charge is made each night. This is normally based on a benchmark rate per cent like LIBOR + broker margin per cent / 365. For simplicity we will assume the price of Apple shares stayed the same until the market close and so no P&L was generated on this day. $19,442.00 x (0.0025 + 0.02) / 365 = $1.20
Step 3 Closing the position
The next day Apple share price has risen by $6.15. Our trade has moved in our favour and we decide close the position and take profit.
Our CFD provider is quoting $200.50 bid and $200.58 offer.
Sell 100 Apple CFDs at bid price 100 x 200.50 = $20,050.00
The position is now closed and so margin requirement is now zero $0.00
You get charged commission of 0.1% on this transaction $20,050.00 x 0.001 = $20.05
Gross profit is difference between opening position and closing the position $20,050.00 - $19,442.00 = $608
Net profit is gross profit less costs. The costs are commissions and overnight financing. In this example we have been charged commission twice, once to open the position and once to close it, and we have been charged one day overnight financing. $19.44 + $20.05 + $1.20 = $40.69
Profit & Loss shows a profit after costs $608.00 – $40.69 = $567.31
In summary we have had to deposit $972.10 to cover margin on this trade and made a profit of $567.31. If the price of Apple shares had instead dropped by $6.15, we would have sustained a loss of $647.47 ($608 plus commissions).
[edit] Example 2 - An Index based CFD trade on the S&P 500 IndexIn this example we show an index based CFD. The S&P500 Index is at 1093.9. We believe that the Index will go down and so decide to take a 'short' position. Our CFD broker is quoting 1093.7 bid and 1094.1 offer.
Step 1 Opening a position
Sell 10 S&P500 CFDs at bid price 10 x $1093.7 = $10,937
Margin requirement is open position x margin percentage. Typical value for major indices is 0.5% 10,937 x 0.005 = $54.68
Commission – typically no commission is charged on index CFDs
Step 2 Overnight Financing
To hold a position a financing charge is made, however as we are holding a short position we will instead receive the financing. The rate is normally based on a benchmark rate per cent like LIBOR, from this we subtract the broker margin and divide by 365 to get the daily financing. For simplicity lets assume the US interest rate is 4% and the broker margin is 2%. $10,937 x (0.04 - 0.02) / 365 = +$0.60
Step 3 Closing the position
The next day the S&P has dropped by 10 points to 1083.7 bid and 1084.1 offer
Our trade has moved in our favour and we decide to take profit and close the position
Buy back the position at the lower price 10 x 1084.1 = $10,841
The position is now closed and so margin requirement is now zero
Gross profit is difference between opening position and closing the position $10,937 - $10,841 = $96.00
Net profit is gross profit less costs. In this example financing is actually positive and there are no other costs. So we get a credit of $0.60
Profit and Loss shows a Profit after costs $96.00 + 0.60 = $96.60
In summary we have had to deposit $54.68 to cover margin on this trade and made a profit of $96.60. If the S&P 500 Index had risen instead by 10 points we would have sustained a loss of $95.40 ($96.00 + Costs). Note that the amount of gain or loss was bigger than the margin requirement. In other words, you would have gained or lost more money than you deposited.
