What are examples of CFDs?

Trading with CFDs can be very exciting and can potentially help you generate significant profits. But before you jump into it, you should select a reliable broker with a good track record and great resources you can depend on.

Many beginners find CFDs interesting, but the information online can overwhelm them. This often makes it hard to understand how these derivatives work. Trading may seem simple in theory, but the reality is different. It becomes even harder when your own money is at risk. The examples below will show you several scenarios you may face when trading CFDs.

CFD trading examples

CFDs let you trade many different assets and instruments. You can trade CFDs on metals and choose gold, or trade CFDs on forex and pick any currency pair your broker offers.

Now let’s look at how this works in practice. Imagine you want to buy shares priced at £5.00 each. You could purchase 15,000 shares for £75,000 plus commissions. You could also choose a Contract for Difference (CFD).

If the stock is well-established and highly liquid, your broker may offer a 15% margin. With that margin, you can gain exposure to the same 15,000 shares with only £11,250 up front.

If the share price rises by 15p, you can close the CFD position. In that case, you could make around £2,250 (15p × 15,000), minus broker fees or other costs.

Share CFD example

Let’s look at another example. Suppose Amazon shares trade at 2100–2101p, and your CFD broker offers the same pricing. If you expect the price to rise, you can buy a CFD for 10,000 shares at 2101p. The full contract value is £210,100, but you only need a 10% margin, which is £21,010.

If the shares move up to 2140–2141p, you can close your position by selling 10,000 Amazon CFDs at 2140p. Your gain would be 39p per share (2140p − 2101p). That totals £3,900, minus commissions.

Let’s try another example with BP.

Here’s another example. Imagine BP trades at 520p–521p. You make £20 (2,000 × 1p) for every penny the price rises, and you lose the same amount for every penny it falls. If you expect the price to go up, you can buy 2,000 contracts at 521p.

If the price climbs to 571p–572p, you can sell at 571p. Your profit would be (571p − 521p) × 2,000 = £1,000.
If the price drops to 471p–472p, you would sell at 471p instead. In that case, your loss would be (471p − 521p) × 2,000 = £1,000.

Index CFD example

• Trading the Footsie

The FTSE 100 currently stands at 6208, and a CFD provider offers a CFD linked to this market index, with a spread quoted as 6205 – 6211. The CFD’s price is determined based on this spread, specifically at £6,211. If you believe that the index will experience an uptick, you can acquire as many CFDs as necessary to attain your desired exposure. For instance, you decide to purchase 3 CFDs, resulting in a total trade value of £18,633. However, you only need to provide an initial margin of 1.5%, which amounts to £279. If the FTSE 100 increases to 6260, you have the option to close your position, yielding a profit of 6257 – 6211 = £46 × 3 = £138, factoring in any commissions in the spread.

• Trading the Dax index

Now let’s look at the DAX 30 index. It trades at 6100–6101, and trading it lets you speculate on the German market as a whole. You gain €5 for every point the index moves down, and you lose €5 for every point it moves up.

If you expect the DAX to fall, you can sell 5 contracts at 6100. If the price drops to 5999–6000, you can buy at 5999. Your profit would be (6100 − 5999) × 5 = €500.

If the price rises instead to 6200–6201, you would buy at 6200. In that case, your loss would be (6200 − 6100) × 5 = €500.

Crude oil CFD example

In the following example, let’s take crude oil. One CFD represents exposure to 100 barrels. Let’s assume it is currently priced at $145 per barrel, and your CFD provider offers a CFD with a spread of $144.95 – $145.05. If you believe that the price will decrease, you can sell an appropriate number of CFDs to achieve your desired exposure. Let’s say you sell 2 CFDs, resulting in a total trade value of 2 x 100 x $144.95 = $28,990, while requiring a 5% initial margin of $1,449. If the price falls to $140, you have the option to close your position, resulting in a profit of $144.95 – $140.05 = $4.90 x 100 = $490, including any commissions in the spread.

Each CFD is equivalent to 1 currency unit in the underlying market. Brent Crude is currently priced at $85.00 – $85.05. If you anticipate an increase in Brent Crude’s price, you can buy 8 contracts at $85.05. If the price rises to $86.05 – $86.10, you can sell at $86.05, resulting in a profit of ($86.05 – $85.05) x 8 = $800. Conversely, if the price falls to $84.05 – $84.10, you can sell at $84.05, leading to a loss of ($84.05 – $85.05) x 8 = $-800. Please note that CFD trades are executed in the currency of the underlying instrument, which may result in profit/loss fluctuations due to currency exchange rates.

CFD forex example

Going long on EUR/USD

You believe the euro is going to strengthen against the dollar due. So, you decide to buy (go long) 10,000 units of EUR/USD at 1.06600.

For every pip the price moved in your favour, you’d make $1, and for every pip, it moved against you, you’d lose $1.

Margin (Marhen)

EUR/USD has a margin requirement of 3.33% of the notional value of the trade. So, you’d need to deposit 3.33% of your position’s full value (10,000 x 1.06600 = 10,660) to enter your trade.

This means your margin requirement would be $355.

The margin and profit & loss are calculated (and denominated) in the second, or counter currency of the pair – in this case the US dollar. City Index automatically converts trading P&L into your denominated account currency at the prevailing market rate at the time that the trade is closed.

Profiting from a forex trade

Let’s say your prediction was correct, and the euro did rise in price against the dollar up to 1.06650.

That equals a 5-pip change, which would give you a profit of $5 – calculated as the closing price (1.06650) minus the open price multiplied by 1.

Why you should trade CFDs with IronFX

At IronFX, we pride ourselves on our dedication to providing unparalleled client support, delivered in more than 30 different languages. Our commitment to excellence has earned us over 40 prestigious awards, making us an award-winning broker trusted by 1.5 million traders worldwide. With a vast selection of 500+ tradable instruments across six asset classes, we offer the flexibility and diversity you need to succeed in the pampinansyal na merkado.

But that’s not all. We go beyond just offering a wide range of assets. We provide independent research analysis and cutting-edge tools from Trading Central, giving you the insights you need to buy and sell CFDs with up-to-date and exclusive insights. From our trading courses to webinars, trading videos, and analysis, our team of financial analysts ensures you have accurate information before you hit the button.

What’s more, our state-of-the-art trading platforms, including IronFX’s mobile trading app, Web Trader app, MetaTrader 4, WebTrader, PMAM, and TradeCopier allow you to make fast and secure trades, minimising costs and ensuring ultimate security. Traders can trust IronFX to provide the much-needed support and tools they need to trade effectively.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.