CFD example one: Going long on the Wall Street index
To illustrate how CFD trading works, let’s look at an example on Wall Street, City Index’s equivalent price for the Dow Jones.
The Wall Street index is currently trading at 34,790 /34,792. The first figure is the sell price and the second is the buy price.
You think that US blue-chip stocks are in for a bull market, which would cause the Wall Street market to rise. So, you decide to open a long position by buying 5 Wall Street CFDs at 34,792.
To open your Wall Street position, you’ll need to have enough margin in your account. In this example, let’s say that Wall Street requires you to keep 5% of your position’s total value in your account as margin.
Your position is worth (34,792*5) $173,960, so you’ll need 5% of 173,960 to make the trade – $8,698.
The higher the value of your trade, the more money you’ll need to deposit. Alternatively, you could reduce your margin outlay by reducing the size of your position. If you only buy one CFD, you would only need $1739.6 as margin.
Remember, though, that you’ll also need enough free equity in your account to sustain any losses and cover any costs. Otherwise, you risk of a margin closeout.
Notice that your margin is calculated in USD. That’s because with CFD trading, your margin requirement, financing and any unrealised profit or loss will be in the base currency of the selected market. In this case, US dollars.
The City Index platform will automatically convert your margin, financing and P/L into your account’s base currency, though, so you don’t need to do it manually.
When you open a CFD position, it’s a good idea to ensure that you have a risk management strategy in place. Most traders will choose a profit target and maximum loss for any opportunity, then use stop losses and take profits to automatically close their position once either level is reached.
For this trade, you decide to target 75 points of profit, with a maximum loss of 25 points. You set a take profit at 34,867 and a stop at 34,767.
Winning on a long CFD trade
Let’s take a look at what would happen if your trade was a success.
The Wall Street index rises as you predicted, climbing 57 points to a new price of 34,847/34,849. That’s still a little off your target, but due to changing market conditions you decide to close the position.
You bought 5 CFDs at the outset, so you sell 5 CFDs at 34,847 now to exit the trade.
34,847-34,792 is 55 points. Your 5 CFDs earn you $5 for every upward point of movement, giving you a total profit of (55*5) $275.
If you had kept the position open over more than one day, your profit would be lower due to overnight financing.
Losing Wall Street trade
But what would have happened if the Wall Street Index had fallen instead?
Supposing the Wall Street index falls to 34,767/34,769, which triggers your stop loss and closes the position.
Your stop will automatically sell 5 CFDs at the new sell price of 34,767. This represents a 25-point loss in your trade which, when multiplied by the 5 CFDs, leaves you with a $125 loss.
Again, financing will be automatically debited from your account every night for the period that you hold your position.
CFD example two: Shorting Twitter
You believe that Twitter shares will fall over the coming weeks as the company is set to report a disappointing set of earnings. You decide to short 50 CFDs.
City Index quotes a Twitter price of 50.05/50.06. To open a short position, you trade at the sell price – so you sell 50 CFDs at 50.05, with a stop loss at 56.05.
Margin and commission
Twitter has a margin requirement of 20%, so you’ll need to deposit 20% of your position’s full value ($500.50) to make the trade. And because Twitter is an equity, you’ll pay commission to open the position.
Commission on US stocks is 1.5 cents per CFD, or a minimum of $15. You’re below the minimum commission, so you pay $15. In order words, trading 1000 US shares or less is US$15 per trade.
Profiting from your short CFD trade
You were right and Twitter’s share price falls to 42.09/42.10 over the next three days. At this point, you decide to lock in your profits and close the trade. To do so, you’d need to buy 50 Twitter CFDs at 42.10.
The price difference of 50.05 - 42.10 is 7.95. Your 50 CFDs earn you $50 for each downward point of movement, so you’ve made $397.50 gross profit.
However, you have paid $15 (opening) + $15 (closing) commission on your position, which would reduce your overall profit to $367.50.
Keeping the position open for three days also means it will be subject to overnight financing. Financing on short positions is usually credited to your account, unless SOFR is below 2.5%. In these circumstances, it would be debited from you.
Losing CFD trade
Now let’s see what would have happened if Twitter had risen instead.
Some hours after placing your trade you see that Twitter has rallied. Thankfully, you had your stop loss in place which cut your losses at 56.05.
In this instance, your trade has lost 6 points, or $300. After taking commission into account, your overall loss is $330 – adding in $15 + $15 from opening and closing the trade.
Financing will be automatically debited or credited from your account every night for the period that you hold your position.