So, how does CFD Trading work?

CFD trading enables speculation on market movements without owning the underlying asset. Contracts are bought and sold, instead of physical shares, with an agreement between the buyer and seller to swap the difference in value at the closing of the contract.

Examples of a CFD trade:

The UK 100 is currently trading with Core Spreads at price of 7300.1 – 7300.9.

You decide to sell, ‘go short’, 10 CFDs at 7300.1. You are trading 10 CFD's for each 0.1 move in the price of the market.  The value of this trade, also known as the notional value, is  £730,010 (10/0.1 x 7,300.1).

Opening trade: 7300.1 Closing trade: 7291.2
8.9
Difference

The market falls in value and at the Core Spreads quote falls to 7,290.4 – 7,291.2 and you decide to close the contract at a price of 7,291.2. The difference between the opening value of the trade (£730,010) and the closing level of the trade (£729,120) is £890.

Number of CFDs traded: 10 per 0.1 move in the price of the UK100. Each CFD has a value of £1

Profit on Trade: 8.90 x (10 / 0.1) = £890

The next example is on the US Tech 100 market, also known as the NASDAQ100.  believes that the value of the US Tech 100 is going to appreciate. 

You believe that the value of the US Tech 100 is going to appreciate. The index is being quoted by Core Spreads at a spread of 5,400.2-5,400.6 and you decide to go buy, or 'go long' with a 10 CFD stake. You have chosen to buy 10 CFD's per 0.1 move in the price of the market. The total notional value of your trade is $540,060 (10/0.1 x $5,400.6).

Against your expectations, the US Tech 100 falls and the Core Spreads price is quoted at 5,390.2 – 5,390.6. You decide to close the trade, selling 10 CFDs at 5,390.2. The difference between the opening value of the trade ($540,060) and the closing level of the trade ($539,020) is $1,040.

Opening trade: 5400.6 Closing trade: 5390.2
10.4
Difference

No. of CFDs traded: 10 per 0.1 move in the price of the US Tech 100. Each CFD has a value of $1

Loss on Trade: 10.40 x (10 / 0.1) = $1,040

Margin trading

A key difference between a CFD and traditional forms of trading is that it is a leveraged product. This means that only a small percentage of the total exposure to a trade needs to be deposited in your account, this is known as margin. 

In the above example, the Core Spreads margin requirement to place a trade on the US Tech 100 is 1%. Whilst the total nominal value of the trade is $540,060 only $5,400.60 needs to be deposited with Core Spreads to open the 10 CFD trade ($540,060 x 1%).

This gearing means that CFDs offer the potential for significantly larger profits than standard forms of trading. However, it is important to note that with these potential profits comes an increased risk of incurring losses in excess of the margin you deposit with us.

 

Core Spreads

Core Spreads is financial trading as it should be. No noise – just tight spreads on thousands of markets.