Opening the position
On the 19th September Vodafone looks a great buy at 113.91p, you decide to buy 10,000 shares in this company. You could trade using traditional share dealing to speculate on Global Markets or you could use Contracts for Difference.
By trading CFDs rather than physical traditional shares you are automatically improving your chances of winning from this trade:
Traditional Shares CFD
Vodafone price 113.91p 113.91p
Buy Quantity 10,000 10,000
Ticket Value £11,391 £11,391
UK Stamp Duty £60 N/A
Commission £113.91 £17.08
(1%) (0.15%)
Funds to initate position £11,564.91 £586.63
The funds to initate the position are clearly lower for CFDs than traditional share dealing. When you speculate with CFDs you only have to put down an initial margin of 5%. In order to maintain this position the margin has to be met. If your account can not meet the margin requirements you will be asked to reduce or close your position or alternatively send more funds to cover your margin call.
Closing the position
It is the beginning of October and on the 2nd you decide to take profits in your Vodafone trade. Vodafone is currently trading around 120.23p. To close the position you have to sell the same quantity as you have bought.
Here's how to close out of the position
Traditional Shares CFD
Vodafone price 120.23p 120,23p
Sell Quantity 10,000 10,000
Ticket Value £12,023 £12,023
Commission £120.23 £18.03
(1%) (0.15%)
CFD financing* - £33.74
Total costs £294.14 £68.85
Profit on trade £337.86 £563.15
Total Funds required £11,685.14 £638.40
% Profit on Trade 2.89% 88.21%
*CFD Financing is the cost to trade on leverage on overnight positions. This is calculated at LIBOR + 3%.
Therefore:
10,000 x 113.91p x 7.75% = £882.80 / 365 days = £2.41 per night. The above trade was held for 14 nights therefore CFD financing comes in at £33.74
The first thing to note from the above example is how much cheaper it is to trade via CFDs. To trade the above using traditional share dealing you would have to have funds of £11,685. With CFDs you will need only £638.40.
If the position moves agianst you and you do not have enough funds in your account then you would be required to meet your margin call. Therefore, it is possible to lose more than your initial outlay when trading CFDs. CFDs are considered a high risk investment vehicle and are not suitable to all investors.
Secondly and importantly the return on investment (ROI). Traditional share dealing would have brought a return on investment of 2.89%. Compare this to the return on investment from using CFDs which would have been a staggering ROI of 88.21%.
