Contracts for Difference (CFDs) are a way of trading the price movements of global financial markets without buying or selling the underlying instrument directly. CFDs can be used to speculate on upward as well as downward price movements, so you can profit even if market prices are falling.As with traditional dealing, CFD prices are quoted as a buy ('offer' the price you go long at) or sell ('bid' the price you short sell at). The price of your CFD replicates the price of the underlying instrument and you are charged a small commission for each equity trade that you place with us. Non-equity markets are commission-free but incur a widened spread. Find out more about our financing and charges. All our CFDs are traded in the currency of the underlying market.
Say M&S shares are trading at 455.9/456p (bid/offer) in the underlying market. Our share CFD prices track the underlying market prices, so our price for M&S CFDs is 455.5p/456.5p (sell price/buy price). You think M&S shares will rise over the coming weeks and buy (go long) 10,000 CFDs of M&S based on our buy price of 456.5p. For this you pay a commission of 0.1% of your total trade value.
Sure enough, M&S shares rise in the underlying market the following week and you decide to cash in on your profit by closing your CFD trade. Our current buy/sell price for M&S share CFDs is 460p/461p. You close your CFD position by selling 10,000 CFDs at 460p. This incurs a further 0.1% commission charge. See our Help & Support section for more information.Now remember, CFDs are an agreement between two parties to exchange the difference between the closing price of a contract and the opening price of a contract. The difference in value of trade from open to close will net you a profit or a loss.
In this case, the underlying market moved 4.9p in the direction you had predicted. So your closing value is £46,000 (10,000 x 460p), which is a marked increase from your opening value of £45,650 (10,000 x 456.5p).
The net result is a profit of £350 (46,000 - 45,650) before commission.
Let's now look at what would have happened if you were wrong and prices had moved against you.
If Marks & Spencer's share prices had fallen, instead of rising as you had expected, you would have ended up in a long position. Let's say M&S shares fell from your opening buy price of 456.5p to reach 453p, a movement of 3.5p against the direction that you had predicted.
Your closing trade value would be £45,300 (10,000 x 453p), which is a decrease from your opening value of £45,650 (10,000 x 456.5p), thus netting you a loss of £350.
Still unsure about how you can trade CFDs with City Index? Call 0800 0721107 for answers or let one of our in-house sales executives give you a run-though of the City Index trading platform.
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