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 buy 1,000 share CFDs (units) anticipating a price increase. JPM has a tier 1 margin requirement of 5%, which means traders need to deposit only 5% of the position’’s notional value as margin.
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 may exceed the initial margin deposit (££800).
Here are two possible outcomes:
a) Realizing a Profit on the Trade
If the price moves in the trader’’s favor and rises within the next hour to a bid/ask of 1,624/1,626, and the trader closes the position by selling at 1,625, 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 (1,625 - 1,600) x 1,000 units = ££250.
The net profit on JPM is the gross profit minus total commissions. Commissions are calculated as follows:
1,000 units x 1,600 pence (entry price) x 1.10% = ££16.00
1,000 units x 1,625 pence (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 1,549/1,550, they may close the position by selling at 1,549 to limit further losses.
The gross loss is calculated similarly to profit:
(1,600 - 1,549) x 1,000 units = ££510
Total loss includes commissions and gross loss:
Total commissions: [1,000 units x 1,600 pence x 0.10%] + [1,000 units x 1,549 pence 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 wants to sell 1,000 share CFDs (units) expecting the price to decline. As with the buying example, JPM has a tier 1 margin rate of 5%, so traders must deposit 5% of the position’s value as margin.
The 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.
Two possible outcomes when short selling:
a) Realizing a Profit
If the trader’s prediction is correct and the bid/ask price falls to 1,549/1,550, and they close the position by buying back at 1,550 pence, they will realize a profit of ££490.
Profit: (1,599 - 1,550) x 1,000 units = ££490
Net profit is profit minus commissions:
1,000 units x 1,599 pence x 0.10% = ££15.99
1,000 units x 1,550 pence 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 view is incorrect and the price rises to 1,649/1,650, they may close the position by buying back at 1,650 pence to limit losses.
Loss is calculated by multiplying the position size by the price difference:
(1,650 - 1,599) x 1,000 units = ££510
Total loss includes gross loss plus commissions:
[1,000 units x 1,650 pence x 0.10%] + [1,000 units x 1,599 pence x 0.10%] + ££510 = ££542.49
Calculating Profits and Losses
With these trading examples and formulas clearly outlined, CFD trading is more straightforward than it may seem. A trader’s profit or loss is determined by the difference between the entry price and the exit price of a trade.
Learn more about CFD trading for beginners here.
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