CFD trading
A CFD is traded in standardised contracts, or lots. The size of an individual contract varies. This depends on the underlying asset being traded. This is usually a replica of how the asset is traded on the market.
Take Silver for example. It is traded on commodity markets in contracts of 5,000 troy ounces. The associated CFD has the same value. With share CFDs, the contract size usually represents a share of the company you are trading. To open a position that simulates buying 700 shares of Shell, you would purchase 700 Shell CFD contracts.
This is another way in which CFD trading is more similar to traditional trading than other derivatives , such as options.
Differences to other forms of investment
Typically, CFDs do not have a fixed expiration date, unlike options . In contrast, a position is closed by placing a trade in the opposite direction to the one you chose when you opened it. For example, a buy position of 700 silver contracts is closed by selling 700 silver contracts.
If you leave a CFD position open during the day past 23:00 (the daily closing time, but this depends on the market) you will be charged an ‘overnight fee’. This fee represents the cost of the amount that your provider has effectively lent you in order to open a leveraged trade . Note that this is not always the case. The most common exception is when there is a forward contract. This contract has an expiry date on a day in the future and all overnight fees on this have already been added to the spread.
Profit and loss
You calculate the profit or loss of a CFD transaction as follows. The trading size of the position (total number of contracts) is multiplied by the value of each contract (expressed in number of points of movement). The result is multiplied by the difference in points between the price at the time of opening and closing the contract.
Profit or Loss = (Number of Contracts x Value of Each Contract) x (Closing Price – Opening Price)
For a full calculation of the profit or loss of a trade, subtract all costs you paid from the result. These can be commissions, overnight fees or guaranteed stop costs.
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