Contracts for Difference

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

Example B - Short CFD

You are bearish on British Airways and believe the price is about to drop. You go short of 10,000 on CFD at the bid price of £2.00. The opening consideration is £20,000, requiring you to deposit an initial margin of £2,000. The price falls to £1.90 after a week, enabling you to buy the position back at the closing value of £19,000. This allows you to realise a profit of £1,000 before expenses – a 50% gain on your initial investment.

However, if the price rose to £2.10, the closing consideration would have been £21,000. That constitutes a loss before expenses of £1,000 or 50% of the initial investment.

Using the capital to go short of the underlying security would have allowed you to sell 1000 shares of British Airways. A shift in the underlying price, as above, would have resulted in a £100 gain or loss, equivalent to 5%.