Risk Warning: Trading Contracts for Differences (CFDs), carries a high level of risk to your capital, and is not suitable for all investors. Losses can exceed deposits.
You are currently watching the news and hear a large hurricane is heading towards the Gulf of Mexico, which could push the oil price higher over the weekend. You think that a higher oil price would be beneficial for the major oil companies and decide to purchase BP Plc.
Example 1: Buying (going long) BP plc to profit from a raising share price
You want to buy £20,000 of exposure of BP prior to the market closing on Friday. Here is the calculation.
Buy 5,000 CFDs @ 400p = £20,000
5% Deposit on £20,000 of exposure = £1,000
Commission charge (0.35% on £20,000 ) = £70
Example 1: Trade wins
BP shares open strongly on Monday morning due to higher oil prices moving the BPs share price 4% higher so you sell your shares at 420p for a profit. Here is the calculation to work out net profit.
Sell 5,000 CFDs @ 420p = £21,000 (£1,000 gross profit) (£21,000 – £20,000)
Commission charge (0.35% on £21,000 ) = £73.5 – Commission
3 days for finance charges (3 days) x.2.5% above London Interbank Offered Rate (Libor) = £12
Net profit = (£1,000 – (£143.7 commission- £12 daily finance charges)) = £844.30
Example 2: Losing trade – stop loss is triggered
The FTSE 100 is currently trading at 6000 and you think there is more upside to come.
Most CFD providers make a market on world indices and use a spread between 3 & 5 points on average. We will use a spread of 5997 – 6003 on the FTSE for this example.
The price of 1 CFD is £6,003. The client would like £60,000 of exposure so 10 CFD contracts are bought (10 X 6,003 = £60,030). The client is effectively £10 per point movement and the margin will be 5% so £3,001.50 we be used for deposit. We always advise clients to use a stop loss and the client agreed £800 is the maximum loss for this trade. A stop loss of level of 5945 was placed.
2 days later the FTSE has fallen and the daily FTSE spread is now 5945 – 5948 and the position has hit our stop loss.
The loss on the trade is calculated as follows:
Loss on trade (£10 x 68)
Commission (2 x £50)
Daily finance charges (2 x £8)
NET LOSS £796.00