LONG & SHORT TRADING
Long Trading Example
‘Going long’ is simply buying a CFD position to profit from a price increase. Very similar to traditional trading in that the idea is to buy low and sell high. The difference between the entry price and the exit price is the profit or loss that is made on the CFD trade.
The example below of a long trade is compared to a traditional equity trade. The reason for this is to illustrate the power of leverage for a CFD trader over a traditional share trade as well as that minimal capital is required to gain similar profits and how the CFD trader Return on Investment (ROI) is far greater than the share trade. This is simply because the CFD trader only needs a fraction of the capital to take the trade.
|Opening Purchase Price||$35||$35|
|CFD Margin – 5%||5%||$875|
|Closing BHP Position|
|Quantity sold to close position||500||500|
|Financing charged at 6.5% p.a based
on RBA rate of 4.5% **
|$35.50 x 500 x (RBA rate + 2%) / 365|
|Net Profit (Gross minus trading cost)||$461.34||$460.95|
|Return on Investment||50.49%||2.63%|
** Financing is calculated at the closing market price of $35.50
NOTE: If the price of BHP had fallen by $0.50 Amy would have incurred a loss of $538.66
Please not that in this example we have used FPM’s standard share trading commission of 0.11% with a $14.95 minimum. In many cases share trading with other providers is substantially more expensive.
Short Trading Examples
‘Going short’ is simply opening a short or ‘sell’ CFD position to proﬁt from a potential share price decline. Short selling is the opposite to going long in that the trader wants to sell high and then buy low to achieve a profit. The difference between the opening and closing price is the profit or loss the trader incurs. Leverage and commissions are exactly the same. A short position held overnight receives financing rather than paying financing.
Amy believes Qantas Airlines (QAN) will release lower than expected proﬁt ﬁgures and she expects the share price to drop in response. Amy places a sell order for 10,000 QAN shares at the current market price of $2.50. The margin rate on QAN is 5% therefore $1,250 is required as margin to open the position. The trade is placed and Amy holds a short QAN CFD position. When opening a short position you have received a cash payment for the full value of your short position and receive interest on this amount at the RBA rate minus 2% pa. The overnight interest rate is calculated by dividing the per annum applicable interest rate payable by 365 (days per year).
Please note we have not compared this trade to an identical equity trade due to the limitations with short selling physical shares.
|Opening Short Qantas Position|
|CFDs sold for $25,000 exposure||10,000|
|Closing Short Qantas Position|
|CFDs bought to close position||10,000|
|Position size closed||$24,000|
|Financing Received at 2.5%pa based on RBA rate of 4.5%
$2.45 x 10,000 x (RBA – 2%) / 365 **
|Net Profit (Gross minus trading cost + financing received)||$952.68|
|Return on outlay excluding cost of trade||71.95%|