CFD Trading Example
Example of a long CFD trade: Buying Amazon
OK, so let’s say Amazon stock quotes at $800 per share and you think the price of Amazon will go up.
You would like to buy 10 Amazon stocks. On Nasdaq, that would cost you 800×10=8000$. That is the full contract value of your position.
Instead, you decide to buy 10 Amazon CFD contracts with your broker, enabling you to only put down a margin deposit.
Assuming the margin rate on Amazon is 5% (your broker decides that), you will only need to mobilize that percentage of the full contract value, which means a margin of 8000×5%=400$.
You can reduce that margin by entering a stop-loss (always recommended), thereby limiting your exposure.
You will pay a commission to enter that position, usually around 0.1% of the contract value (here $8000×0.1%=$8).
Your broker will also charge you interest on the overnight position. It is also important to note that the CFD provider will be covering the difference between the contract value and your margin requirement.
What happens next depends on the price evolution of the Amazon stock. The table below shows the impact depending on different scenarios.
|Price reached by Amazon||Your gain / loss||Return on your initial investment|
|Rise by 10%||$880||$783||+98%|
|Rise by 5%||$840||$384||+48%|
|Stays the same||$800||-$16||-2%|
|Decreases by 5%||$760||-$416||-52%|
|Decreases by 10%||$720||-$815||-102%|
The above example does not take into account the overnight interest the broker will charge you.
It clearly shows the magnifying effect of CFDs on the price variations of an asset.
The same example would apply with reversed impacts if you had decided to trade on the short side. With a notable difference that you would be earning overnight interest instead of paying it.