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 also find CFDs interesting and before they start trading they tend to get bogged down by the countless information online, failing to get to grips with how these derivatives actually work. While in theory trading may sound easy, in practice things are much different and, more importantly, can be much more tricky, especially when your own money is on the line. Below, we provide a variety of CFD examples to help you get an idea of the various possible scenarios when trading with them.

CFD trading examples

CFDs allow you to trade on a range of assets and instruments, so you can trade CFDs on metals and go for gold, or trade CFDs on forex and choose any of the currency pairs available through your broker.  

But let’s see how this works in practice. Let’s say you’re interested in purchasing shares that are currently priced at £5.00 each. You have the option to either buy 15,000 shares for a total of £75,000 (plus commissions) or utilize a Contract for Difference (CFD). Assuming this is a well-established stock with high liquidity, and your broker offers you a CFD with a 15% margin, you could gain exposure to those same 15,000 shares with an initial margin of just £11,250. If the stock’s price then increases, for instance, by 15p, you could close your CFD position and potentially make a profit of approximately £2,250 (15p x 15,000), minus any broker fees or additional expenses.

Share CFD example

Let’s consider a different example. For example, let’s say Amazon shares are currently trading at 2100 – 2101p in the market, and your CFD broker provides a CFD with the same pricing. If you believe the price will increase, you have the option to purchase a CFD for 10,000 shares at 2101p. The total value of the contract would be £210,100, but you would only need an initial margin of 10%, which amounts to £21,010. If Amazon shares rise to 2140 – 2141p, you can opt to close the CFD position by selling 10,000 Amazon CFDs at 2140p. This results in a gain of 2140p – 2101p = 39p x 10,000 = £3,900, minus commissions.

Let’s try another example with BP.

When it comes to trading BP, let’s say it is priced at 520p – 521p. You earn £20 (2,000 x 1p) for every penny the price increases and lose £20 for every penny it decreases. Suppose you anticipate an increase in BP’s price and decide to purchase 2,000 contracts at 521p. If the price rises to 571p – 572p, you can sell at 571p, resulting in a profit of (571p – 521p) x 2,000 = £1,000. Conversely, if the price falls to 471p – 472p, you can sell at 471p, leading to a loss of (471p – 521p) x 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

Trading the DAX 30 index, which is currently priced at 6100 – 6101, allows you to speculate on the German market as a whole. For every point the DAX moves down, you gain €5 (5 x €1), and you lose €5 for every point it moves up. If you believe the DAX price will decline, you can sell 5 contracts at 6100. If the price falls to 5999 – 6000, you can buy at 5999, resulting in a profit of (6100 – 5999) x 5 = €500. Conversely, if the price rises to 6200 – 6201, you can buy at 6200, leading to a loss of (6200 – 6100) x 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 (الهامش)

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 الأسواق المالية.

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, ميتاتريدر 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.