How do CFDs Work
To give an example, if a long CFD trade was agreed at a price of $1.00 and the underlying share price rose to $1.50 then the buyer would receive 50 cents per unit. Conversely, if the assets value fell to 50cents the buyer would pay the seller 50 cents per unit.
The CFD contract is open-ended and will remain in force until the holder decides to close.
As with normal share trading, your net profit or loss is determined by the difference between the buying and selling price.
Example: Cost comparison of a CFD trade versus a physical share trade
| Day 1 Buy 500 XYC @ $12 = $6000 |
| Margin @ 5% |
$300 |
N/A |
| Commission |
N/A |
$30 |
Cost Comparison - Initial Outlay required
to make The Trade |
$300 |
$6030 |
| Day 3 Sell 500 XYC @ $13 = $6500 |
| Financing @ Approx 4% Annually |
$1.25 |
N/A |
| Commission |
N/A |
$30 |
| Gross Profit/ Loss |
$500 |
$500 |
| Total Cost of Transaction |
$0 |
$60 |
| Net Profit/ Loss |
$498.75 |
$440 |
| % Return on Investment (ROI) |
166% |
7.3% |
CFDs are increasingly being used by investors, both as part of their trading portfolio and as an alternative to physical share trading. As CFDs mirror the performance of the underlying physical share market, someone who currently speculates on the physical share market should find the transition to CFD trading effortless. However, CFDs offer many benefits over and above physical share trading.