Profits & Losses Trading CFD’s

The other feature in which CFD’s differ from ordinary shares is the way in which your account adjusts according to the positions which you have open. When you purchase shares the overall value of your shares will go up or down.

Example:

You have $1,000 worth of Telstra shares, if Telstra increases their price from say $5 to $5.05 then your overall value of TLS shares increases to $1,010.

However when trading with CFD’s it is not the overall value of your position which increases or decreases. Instead the profit or loss is determined from the free equity (cash) you have in your account. Put simply, if the CFD position you hold experiences a loss or gain then your free equity will subsequently decrease or increase

Example:

You have $1,000 of free equity and you are “long” $1,000 in a Telstra CFD (based on a 5% Margin). If TLS decreases from $5 to $4.95 then the free equity in your account will decrease by $200 to $800. The value of your position will remain at $1,000.

What this means to investors is that they must ensure that they have enough free equity to cover their losses, otherwise brokers will close out your positions.

Lets say that a stock is trading at $5 and you believe that the price of it will go up.
The CFD margin on the stock is 5% and the CFD commission charge is $10 per trade.

(This example will highlight the benefits of a small initial outlay with CFD’s in comparison of the outlay with shares to achieve a similar result)

The share price over 3 days increases to $5.20

Position Example A (a long position)

Position Example B (a short position)