CFD Trading Examples

Buying

For example, JP Morgan Chase & Co (JPM) is quoted at a bid/ask price of 1,599/1,600p, and a trader intends to purchase 1,000 share CFDs (units) anticipating a price increase. JPM has a tier 1 margin requirement of 5%, meaning traders only need to deposit 5% of the position’’s notional value as margin collateral.

In this case, the trader’’s CFD margin requirement will be ££800 [calculated as 5% x (1,000 units x 1,600p entry price)]. However, if the market moves against the trader, losses can exceed the initial margin deposit (££800).

There are two potential outcomes in this scenario:

a) Realizing a Profit from the Trade

If the price moves favorably and rises within the next hour to a bid/ask of 1,624/1,626p, and the trader closes the position by selling at 1,625p, they will realize a gross profit of ££250.

Profit is calculated by multiplying the price difference by the position size.

In this example, it is (1,625p - 1,600p) x 1,000 units = ££250.

To determine net profit on JPM, subtract total commissions from the gross profit. Commissions are calculated as follows:

1,000 units x 1,600p (entry price) x 1.10% = ££16.00

1,000 units x 1,625p (exit price) x 1.10% = ££16.25

Total commissions = ££32.25

Net profit: ££250 - ££32.25 = £217.75

b) Realizing a Loss

If the trader’s forecast is incorrect and the price declines to a bid/ask of 1,549/1,550p, they may choose to close the position by selling at 1,549p to limit further losses.

Gross loss is calculated similarly to profit:

(1,600p - 1,549p) x 1,000 units = ££510

Total loss includes commissions plus gross loss:

Total commissions: [1,000 units x 1,600p x 0.10%] + [1,000 units x 1,549p x 0.10%] = ££31.49

Total loss: ££510 + ££31.49 = £541.49

Selling

In a short-selling scenario, JPM is quoted at a bid/ask price of 1,599/1,600p. A trader intends to sell 1,000 share CFDs (units) expecting the price to decline. Similarly, JPM has a tier 1 margin rate of 5%, so traders must deposit 5% of the position’s value as margin collateral.

Margin requirement is calculated as:

(5% x (1,000 units x 1,599p sell price)) = ££799.50

However, losses can exceed the initial margin deposit.

There are two possible outcomes when selling your position:

a) Realizing a Profit

If the trader’s view is correct and the bid/ask price falls to 1,549/1,550p, and they close the position by buying back at 1,550p, they will realize a profit of ££490.

Profit: (1,599p - 1,550p) x 1,000 units = ££490

Net profit is profit minus total commissions:

1,000 units x 1,599p x 0.10% = ££15.99

1,000 units x 1,550p x 0.10% = ££15.50

Total commissions: ££15.99 + ££15.50 = ££31.49

Net profit: ££490 - ££31.49 = ££458.51

b) Realizing a Loss

If the trader’s prediction is incorrect and the price rises to 1,649/1,650p, they may choose to cut losses by buying back at 1,650p to close the position.

Loss is calculated by multiplying the position size by the difference in buy price:

(1,650p - 1,599p) x 1,000 units = ££510

Total loss is gross loss plus commissions:

[1,000 units x 1,650p x 0.10%] + [1,000 units x 1,599p x 0.10%] + ££510 = ££542.49

Calculating Profits and Losses

With these trading examples and formulas clearly outlined, CFD trading is more accessible than it may seem. A trader’s profit or loss is determined by the difference between the entry price and exit price of the trade.

Learn more about CFD trading for beginners here.

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