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How CFD trading can turn a gain of 16% into a gain of 150%!

by , 02 June 2014

If you're looking for a way to gear up your potential profits, then trading contracts for difference (CFDs) may be just for you. So how does trading CFDs work? And how does the gearing element of CFD trading boost your profits? Let's take a closer look…

Putting a long CFD trade on

The best way to see how CFD trading works, is to see them in action. If you want to know more about the basics of CFDs, have a look here.

So let’s go through an example of a long CFD trade, the FSP Invest experts in the Ultimate Contracts for Difference Guide explain…

After much research, you decide to put on a long CFD trade on Company ABC. Company ABC is currently trading at R112 each.

You buy 100 CFDs of Company ABC. This gives you an overall exposure of R11,200 (R112 x 100). Your CFD trading company has a 10% margin requirement. So your initial margin is R1,120 (10% of R11,200).

Costs can vary depending on your CFD provider

Your CFD provider charges you 0.5% brokerage, so that’s R56 (0.5% x R11,200). The CFD provider you use doesn’t charge VAT. And you don’t pay costs like STRATE with CFD trading.

Just before market close, Company ABC is trading at R130/R130.20. Because the share has risen so much, you decide to grab your money and run.

Of course, if you held the trade open overnight, you’d have to pay a funding cost.

You sell 100 CFDs on Company ABC to close the trade. This is a total exposure of R13,000 (R130 x 100).

The brokerage on your closing position is R65 (0.5% x R13,000).

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How to calculate your total gain on your CFD trade

Your profit is R1,800 (R13,000-R11,200). Your total brokerage is R121. So your total profit is R1,679 (R1,800 – R121).

From a 16% ((R130 – R112)/R112) share price move that equates into a 149.9% (R1,679/R1,120) return on your R1,120 margin.

So there you have it, how CFD trading can turn a gain of 16% into a gain of 150%.

How CFD trading can turn a gain of 16% into a gain of 150%!
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