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How to bank a 22.81% gain from a 3.66% share price move

by , 17 June 2020
How to bank a 22.81% gain from a 3.66% share price move
Q. ”You have suggested that you've moved your stop loss on Kumba to close your trade at R363.00 to lock in a gain of 22.81%. The entry price was R350.18 and with the difference between the two is R12.82.

This is only a 3.66% move from where you entered. How do you arrive with a gain of 22.81%?

I look forward your explanation.”

 
A. To understand how I banked a 22.81% gain, we’ll need to understand the difference between buying shares and buying CFDs.
 
When you buy a share at R350.18 you’ll pay for the full price in order to own the share.
 
NOTE: We’ll exclude costs for simplicity purposes.
 
If the share price moves 3.66%, the maximum you can make is 3.66%.
 
This means, there is a 1 to 1 ratio when you buy shares. And we say, there is a gearing of 1:1.
 
When you buy a CFD on the same share, you’ll pay a tiny deposit and you’ll be exposed to the full value of the share. This is thanks to the power of gearing…
 
Let’s say the share price of Kumba is at R350.18 and the CFD on Kumba has a gearing of 6.23 times.
 
This tells us that every 1% the share price moves, you stand a chance to bank 6.23% of the total amount of money you deposited into your trade.
 
Also, you’ll only pay a deposit of R56.20 per CFD (R350.18 ÷ 6.23), and be exposed to the full value of the share (R350.18). The deposit you pay to own a CFD on a share is known as the ‘Margin per CFD’.
 
Now, if the share price moves to R363.00 and you close your CFD position at that price, you’ll bank a 22.81%.
 
To calculate this, we’ll simply take the difference between the closing price and then open price and divide it by the Margin per CFD.
 
Percentage gain per CFD = [(Closing price – Entry) ÷ Margin per CFD] X100
                                    = [(R363.00 – R350.18) ÷ R56.20] X100
                                    = 22.81%
 
In conclusion:
 
WITH SHARES:
When you buy a share with an entry at R350.18 and you close it at R363.00, you’ll bank a gain of 3.66%. [(R363 – R350.18)] ÷ R350.18
 
WITH CFDs:
When you buy a CFD of a share with a gearing of 6.23 with an entry at R350.18 and you close it at R363.00, you’ll bank a gain of 22.81%. [(R363 – 350.18) ÷ R56.20.
          
 
 
 
________________________________________

“I made R8,000 on 2 trades!”
 
The best trades that I took made me about R8,000 from
Brent crude and USD/ZAR.
 
I also made money on Merck, US 500 and DE30. I am none
the less keen to get in on my next lot of trades.
 
~ Ariusw, Pickpocket Trader
 
 
________________________________________
 
 
 
________________________________________
 
 
"Q. I’ve just joined Red Hot Storm Trader and I have a slight problem… I don’t have time in the day to take a trade as I am a designer and work from 8am until 5pm every day.
 
I guess I have only one question to help bring peace of mind with my dilemma…  
 
Will I be able to place a CFD trade order, for the next day, after I finish work when the stock market closes?
 
Thank you in advance."
 
A.  Yes absolutely.
 
Whether the stock market is opened or not, you’ll be able to set and execute your trading order when you get home.
 
You’ll simply go onto your trading platform, look for the CFD you want to trade and put in your trading levels including:
 
Entry (limit) price:
 
Stop loss price:
 
Take profit price:
 
Number of CFDs to buy or sell according to your risk:
 
Place limit order…  
 
When the market opens the next day, the active instruction from the previous night, will trigger if the share price trades through your set (limit) price.
   
Trade well, 
Timon Rossolimos,
Analyst, Red Hot Storm Trader 


How to bank a 22.81% gain from a 3.66% share price move
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