CFD trading uncovered: How a small rise in price can make ample profits

By trading contracts for difference (CFD) you can take advantage of trading on margin. This translates into gearing.

Get a trade right and gearing multiplies your profits.

Let's take a closer look at how this works when you trade…

How CFD trading works when you go long

Let’s say you’ve been analysing Company ABC and you’re sure the share price is going to rise. Instead of going out and buying 100 shares in Company ABC, you could buy (go long) 100 CFDs on Company ABC.

This gives you the same exposure, but you only have to put down a small percentage of the total value in margin to open a trade. Plus the trading costs are cheaper than investing in shares.

You go long 100 Company ABC CFDs. The share price is R112. This means the total value of your trade is R11,200.

If the margin requirement for the trade is 10%, you have to put down R1,120 to open the trade.

To enter the trade costs you R56 in brokerage.

You pay a financing charge of R2.45 for holding the position open overnight.

The following day, the share price of Company ABC jumps higher to R130/R130.20. You decide to close your trade to take your profit.

You sell your shares at R130, meaning the value of your shares when you close the trade is R13,000.

You pay R65 in brokerage to close the trade.

Totting up your profits from a long CFD trade

To work out your profits, you need to do the following:

Work out the difference between the opening and closing value of the trade:

• R13,000- - R11,200 = R1,800

The total brokerage for opening and closing the trade:

• R56 + R65 = R121

Any financing charges you paid:

• R2.45

This gives you an overall profit of:

• R1,800 – R121 – R2.45 = R1,676.55

In other words, a return of 149.6% ((R1,686.55/R1,120) x 100) from a 16% rise in share price.

So there you have it. How a small rise in price can make ample profits when you trade CFDs.

Tags: cfds, cfd, how cfd trading works, long cfd trade, profitable cfd trade,