Example of a CFD trade
Let’s take a look at a long and a short CFD trading scenario.
You can trade whether the market is going up or down.
With CFD trading, your profit or loss is determined by the difference between the buy price and the sell price of the financial instrument you’re trading, which means you can trade either long or short depending on which direction you think the market is headed.
Going long - buying in a rising market
If you buy a CFD you think will rise in value and you’re right, you can sell it for a profit. If the value goes down instead, you will make a loss.
Going short - selling in a falling market
If you sell a CFD you think will fall in value and you’re right, you can buy it back at a lower price, for a profit. If the value goes up instead, you make a loss.
Default leverage and customisable leverage
Most CFD providers only offer CFDs with a single level of leverage. The CMC Tracker platform offers a particular level of leverage as a default, then allows you to dial your leverage up or down to the level where you feel most comfortable trading.
The examples below demonstrate the buying and selling of CFDs using both the default and the customisable leverage available on the CMC Tracker platform.
Buy examples
Example 1- Default leverage
Buy 10 Australia 200 CFDs at a price of $4,472.3*.The default margin level is at 1% (99% financing). This means you only have to put forward 1% of the total size of the position as initial margin.
Total exposure = Price x Number of units
Total exposure = $4,472.3 x 10
Total exposure = $44,723
Initial margin = Total exposure x Margin
Initial margin = $44,723 x 1%
Initial margin = $447
Therefore, for a $447 deposit you will control a $44,723 position. Your profit or loss will be relative to the total position size and is not limited to the $447 initial margin.
You have effectively borrowed $44,276 to transact this trade.
Example 2 – Customisable leverage
You decide to lower your risk by borrowing less to transact this trade. Again, you decide to buy 10 Australia 200 CFDs at $4,472.3. However, this time you dial the margin up to 20% by dialling down the financing level to 80%. This means that you will put forward 20% of the total size of the position as initial margin.
Total exposure = Price x Number of units
Total exposure = $4,472.3 x 10
Total exposure = $44,723
Initial margin = Total exposure x Margin
Initial margin = $44,723 x 20%
Initial margin = $8,944.6
Therefore, for a $8,944.6 deposit you will still control a $44,723 position. Your profit or loss will be relative to the total position size and is not limited to the $8,944.6 initial margin.
You have now effectively borrowed only $35,778.4 to transact this trade.
Sell examples
Example 1 – Default leverage
You sell 10,000 Telstra CFDs, at $3.950. The default margin level is at 5% (95% financing), meaning you only have to put forward 5% of the total size of the position as initial margin.
Total exposure = Price x Number of units
Total exposure = $3.950 x 10,000
Total exposure = $39,500
Initial margin = Total exposure x Margin
Initial margin = $39,500 x 5%
Initial margin = $1,975
Therefore, for a $1,975 deposit you will control a $39,500 position. Your profit or loss will be relative to the total position size and is not limited to the $1,975 initial margin.
You have effectively borrowed $37,525 to transact this trade.
Example 2 – Customisable leverage
You decide to lower your risk by borrowing less to transact this trade. Again you decide to Sell 10,000 Telstra CFDs, at $3
95, but this time you dial up the margin level to 50% by dialling down the financing level to 50%. This means that you will put forward 50% of the total size of the position as initial margin.
Total exposure = Price x Number of units
Total exposure = 3.95 x 10,000
Total exposure = $39,500
Initial margin = Total exposure x Margin
Initial margin = $39,500 x 50%
Initial margin = $19,750
Therefore, for a $19,750 deposit you will control an $39,500 position. Your profit or loss will be relative to the total position size and is not limited to the $19,750 initial margin.
You have effectively borrowed $19,750 to transact this trade.
*Subject to changes in exchange rate