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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
Share CFD Physical Share
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.
 
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* The high degree of leverage that is obtainable in the trading of off-exchange FX transactions can work against you as well as for you. Leverage can lead to large losses as well as gains.
** InterForex is compensated through the difference between the buy and sell prices.

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