Why are there two prices for each CFD?
In the same way as traditional trading, in CFD pricing there is a bid price and an offer price. These are the price levels that you can sell at – the bid price – or can buy at – the offer price.
If you anticipate that the price of an instrument like a stock index or a commodity will increase you open a buy (long) position with a view to exiting this position when the instrument has reached a higher price.
In the opposite case, if you anticipate that the price of an equity or a bond is likely to fall, then you open a sell (short) position with a view to exiting this if the price goes lower.
What does “sell” a CFD mean?
Sometimes people can have trouble understanding the concept of opening a sell position – or a “short” – wondering how can they “sell” something they don’t already own. It can be easier to consider a short position as a financial expression of your view that an instrument’s price will go down, rather than actually selling something.
What do the prices mean? Is it Dollars, Euros, what?
Our CFDs will be traded in the underlying currency of the symbol, unless otherwise specified on our market information sheet. For example, a CFD on the US Dow Jones equity index will be traded in US Dollars while a UK equity like Lloyds Bank will be traded in British Pounds.
Long Dow Jones CFD
There is a major data event in the US. You anticipate that US equity indices will probably rally following this event and you want to profit from this development. You decide to Buy (or “go long”) 10 US30 contracts at the price of 16,370.
US30.CASH is the CFD symbol for the Dow Jones equity index on ADS Prime’s platforms and each point movement equates to a $1 profit or loss. You have decided to buy 10 contracts thus each point movement will equate to a $10 profit or loss.
When the data is released, there is major buying activity and a subsequent increase in the value of the index. The market price is now quoted at 16,600 and you decide to close your position by selling 10 contracts.
To calculate your profit, you calculate the difference between the opening and closing price, multiplied by the number of CFDs you held, in your case 10 contracts:
16,600 – 16,370 = 230 points; 230 points x 10 CFDs = $2,300.
Short US Oil
You anticipate that a correction is due in the price of Oil. You decide to Sell (or “go short”) 10 CFDs of USOIL.AUG7 contracts at $49.07. USOIL.AUG7 is the CFD symbol for Oil’s price per barrel, priced in US Dollars at the time of typing.
One CFD equates to 10 barrels of oil, so with this position every time oil’s price per barrel drops $1 you will be making $1,000 profit. Your position is equivalent to 1,000 barrels.
US Oil’s prices drop during the day due to fresh economic data and now its price is at $48.07. You decide it’s time to exit your position and take your profits by buying 10 CFDs to close your position.
Oil has dropped $1 in price since the time you opened your position, moving from $49.07 to $48.07 and you now need to calculate your gains before confirming to exit the trade.
$49.07-$48.07 = $1.00 per barrel. With one CFD accounting for 100 barrels of oil, and having bought 10 CFDs, the total profit is 1 x 100 x 10 = $1,000.
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