How do CFDs work?
The best way to understand how a CFD works is to look at some examples of CFD deals.
Going long - buying a CFD
You are described as going long if you believe the price will rise, and enter into a contract for this. Like traditional share dealing, going long means a profit if the price rises but a loss if the price falls. If the CFD is not opened and closed on the same day then a daily financing charge will apply. There will also be commission charged on the transactions.
A client believes that the price of Company X will rise, so decides to buy a CFD for 10,000 shares at 100p. The deposit required is 10% of the contract value. In the same day, the price rises to 150p, and so the client decides to sell and close the position. There is no stamp duty, and no financing charge as the deal was completed in one day.
Opening the position |
Closing the position |
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| Buy 10,000 shares @ 100p | £10,000 | Sell 10,000 shares @ 150p | £15,000 |
| CFD Commission | £20 | CFD Commission | £30 |
| Deposit required | £1,000 | Profit | £4,950 |
Going short - selling a CFD
You are described as going short if you believe the price will fall, and enter into a contract for this. Unlike traditional share dealing, going short means a profit if the price falls but a loss if the price rises. If the CFD is not opened and closed on the same day then a credit will be paid to your account. There will also be commission charged on the transactions.
A client believes that the price of Company X will fall, so decides to sell a CFD for 10,000 shares at 100p. The deposit required is 10% of the contract value. In the same day, the price falls to 75p, and so the client decides to buy back and close the position. There is no stamp duty.
Opening the position |
Closing the position |
||
| Sell 10,000 shares @ 100p | £10,000 | Buys 10,000 shares @ 75p | £7,500 |
| CFD Commission | £20 | CFD Commision | £15 |
| Deposit required | £1,000 | Profit | £2,465 |