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How CFD trading works: The ins and outs of a profitable short trade

by , 05 June 2015

One of the advantages of trading contracts for difference (CFDs) is you can put on short trades if you think a share price is going to fall.

So how does this work?

Read on to find out…

The workings of a short CFD trade

After conducting some analysis, you think shares in Company ABC are due a fall. So you decide to put a short CFD trade on.

Let’s say that Company ABC is trading at R27.40 a share. You decide to short (sell) 1,000 CFDs at that price. This means the total value of your trade is R27,400 (R27.40 x 1,000).

To open the trade, if the margin requirement was 10%, you need to put down R2,740 (10% of R27,400).

When you short CFDs, instead of paying a daily financing charge, you receive it. If this works out at 0.5% of your total exposure, you’d receive R2.63. Brokerage for putting the trade on adds up to R137 (0.5% of R27,400).

The following day, shares in Company ABC are trading at R26.30/R26.40. You decide to close the trade to take your profit.

You wouldn’t receive funding on the second day as you’re closing your trade before the market closes.

To close your trade, you buy back 1,000 CFDs on Company ABC at R26.40 (the total value of trade is R26,400). You pay R132 (0.5% x R26,400) in brokerage.

Calculating your profits from a short CFD trade

To calculate how much money you’ve made from your trade, you need the total value of the trade when you entered the trade and when you exited it. Plus you need to include any brokerage charges and income from daily financing.

For our short trade, this would work out as follows:

The difference between the opening and closing total value of the trade:

  • R27,400 – R26,400 = R1,000.

The total brokerage paid to enter and exit the trade:

  • R137 + R132 = R269.

Financing income:

  • R2.63

To calculate your profit on your short trade:

  • R1,000 – R269 + R2.63 = R733.63.

That’s a 26.77% ((R733.63/R2,740) x 100) return on your initial margin of R2,740.

So there you have it. The ins and outs of a profitable short trade.

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How CFD trading works: The ins and outs of a profitable short trade
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