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What happens when you get a short CFD trade wrong?

by , 11 June 2015

One of the benefits of trading contracts for difference (CFDs) is you can potentially profit from the drop in the price of a share. This is known as going short or short selling.

The problem with shorting a share is that if it doesn't go your way, it has the potential to keep rising, increasing your losses.

So what happens in you put a short CFD trade on and it goes wrong?

Read on to find out…

How a short CFD trade works

Let’s take a look at what happens when a short CFD trade doesn’t go as planned with the help of an example…

After conducting your analysis, you decide Company ABC is overvalued and due a fall. You decide to place a short CFD trade on this outcome.

Company ABC is trading at R456 a share. You short 100 CFDs on the shares. The total value of your trade is R45,600.

Your stock broker requires a 10% initial margin for you to open your short trade. You put down R4,560 (10% of R45,600).

Your pay R228 in brokerage for putting on the trade.

The following morning, you receive R4.37 in funding income as it’s a short trade. (With CFDs, you pay a daily financing charge for long trades and receive a daily financing charge for short trades.)

But then Company ABC announces a new acquisition, which sends its share price up to R469.90/R470. You decide to close your trade to prevent further losses.

To close your short position, you buy back 100 Company ABC CFDs.

At R470, the total value of your trade is R47,000. You pay R235 in brokerage to close the trade.

So how much have you lost from your short CFD trade?

You do the following to calculate your losses…

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

  • -R1,400 (R45,600 – R47,000).

Add up your brokerage costs:

  • R463 (R228 + R235).

Include any financing charges received:

  • R4.37.

Your total loss is R1,858.63 (-R1,400 – R463 + R4.37). That equates to a 40.76% ((R1,858.63/R4,560) x 100) loss on your initial margin.

So there you have it, what happens when you get a short CFD trade wrong.

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What happens when you get a short CFD trade wrong?
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