2. Deal size
CFDs are traded in standardised contracts (lots). The size of an individual contract varies depending on the underlying asset being traded, often mimicking how that asset is traded on the market.
Silver, for example, is traded on commodity exchanges in lots of 5000 troy ounces, and its equivalent contract for difference also has a value of 5000 troy ounces. For share CFDs, the contract size is usually representative of one share in the company you are trading. To open a position that mimics buying 500 shares of HSBC, you’d buy 500 HSBC CFD contracts.
This is another way in which CFD trading is more similar to traditional trading than other derivatives, such as options.
Most CFD trades have no fixed expiry – unlike options. Instead, a position is closed by placing a trade in the opposite direction to the one that opened it. A buy position of 500 gold contracts, for instance, would be closed by selling 500 gold contracts.
If you keep a daily CFD position open past the daily cut-off time (typically 10pm UK time, although this may vary for international markets), you’ll be charged an overnight funding charge. The cost reflects the cost of the capital your provider has in effect lent you in order to open a leveraged trade.
This isn’t always the case though, with the main exception being a forward contract. A forward contract has an expiry date at some point in the future, and has all overnight funding charges already included in the spread.
4. Profit and loss
To calculate the profit or loss earned from a CFD trade, you multiply the deal size of the position (total number of contracts) by the value of each contract (expressed per point of movement). You then multiply that figure by the difference in points between the price when you opened the contract and when you closed it.
Profit or loss = (no. of contracts x value of each contract) x (closing price - opening price)
For a full calculation of the profit or loss from a trade, you’d also subtract any charges or fees you paid. These could be overnight funding charges, commission or guaranteed stop fees.
Say, for instance, that you buy 50 FTSE 100 contracts when the buy price is 7500.0. A single FTSE 100 contract is equal to a $10 per point, so for each point of upward movement you would make $500 and for each point of downward movement you would lose $500 (50 contracts multiplied by $10).
If you sell when the FTSE 100 is trading at 7505.0, your profit would be $2500.
2500 = (50 x 10) x (7505.0 - 7500.0)
If you sell when the FTSE 100 is trading at 7497.0, your loss would be $1500.
-1500 = (50 x 10) x (7497.0 - 7500.0)