Contracts for Difference

Advantages
Margin Trading
Characteristics
Example A - Long CFD
Example B - Short CFD

Example A - Long CFD

You expect the share price of British Telecom to rise and therefore buy 25,000 on a CFD, at the current offer price of £1.00. The total deal value is £25,000, requiring you to deposit £2,500 (equivalent to 10%) as initial margin. After two days the price has risen to £1.05. You decide to close the CFD contract at a value of £26,250. This yields a profit of £1,250 before expenses – a return of 50% on your initial investment of £2,500.

Conversely, should the price drop to 95p, you would realise a loss before expenses of £1,250 on your CFD - a 50% loss on your initial investment. If you decided to hold your position, you would be required to deposit additional funds of £1,125 calculated as follows:

£0.95 x 25,000 x 10% = £2,375
INITIAL MARGIN + £1,250
UNREALISED LOSS = £3,625 MARGIN REQUIREMENT

If you had invested the £2,500 directly into the underlying security, you could only have purchased 2,500 shares, which would now be worth £2,625 if the price rose to £1.05 or £2,375 if it fell to £0.95 – a mere 5% move by comparison.