Contracts for difference (CFDs) are one of the world’s fastest-growing trading instruments. CFDs, as its name implies, is an agreement between two parties predicting the movement of an asset price.
To make it look clearer, CFD is like buying a house with a deposit, except you buy shares, commodities, indexes, etc. with margin(same thing as a deposit). If the value goes in your favor then you make money and if it goes against you then you lose money and vice versa.
Now let’s come to Trade size and how it works.
This is how trade size works. You must first understand that we measure position size contracts. The contracts have a pre-agreed value.
For example, one contract is equal to one share or 1£ per index point. So in other words, that is going to be £1 per 1 contract.
These correlations are pre-agreed. The brokerage spells them out in their terms and conditions. You would have to double-check this most of the time in case of any change, but more often like now 1 CFD is £1.
So, the value of your position is price multiplied by the number of contracts. Let’s say if you’ve got ten thousand CFDs of Tesco’s at 184 pence, from a quick calculation, the notional value of that is going to be £ 18,400.
So, this is how we work out the whole thing. Let’s go further with the explanation. If the price at 8:00 a.m. is 184 pence and we’ve bought 10,000, our valuation there is eighteen thousand four hundred. So, it’s £18,400 of notional value. If the price quote at 11:00 a.m. moves to 192 pence, that gives us the notional value of £19,200.
So, Let’s do the math. Our profit would be £19,200 – £18,400 = £800.
Commissions on trades might vary with brokers which usually hovers around 1%. We deduct 1% from both the buying and selling value on separate terms. This would leave us with about £762.40.
Of course, the commission goes up as the trading value increases.
This could have gone in the other direction for us. If we had bought this thing at 192 and sold at 184, it’s going to cost us seven hundred and sixty-two pounds. While we’ve included an example here that is profitable, we should also see that there could be a different situation.
Another vital point you must be careful to consider
The value of trade differs by the currency you are trading in. In the above example, we bought 10,000 Tescos at 184 pence, but if you buy the same number of stocks on the US stock market at $184 that is going to be $184,000 as compared to £ 18,400 in the first example. The difference is the price quote in dollars and pence/pounds. Make sure to double-check what the price is, what one CFD is worth, what the value of it is, and understanding the difference in exposure that you’re having.