Going long & short
Spread Betting and CFD trading carry a high level of risk to your capital; you should ensure you understand the risks involved. Please read the full risk warning.
When you open a CFD position you simply speculate on whether you think the markets will move up or down. This means that the more a price moves in your favour, the more money you make; the more the price moves against you, the more money you lose.
In summary:
| If you think that: | You go: | Opening trade | Closing trade |
|---|---|---|---|
| The price will rise | Long | Buy | Sell |
| The price will fall | Short | Sell | Buy |
Please note that all of the examples included on this website are for illustration purposes only.
'Going Long'
Detailed Example:
1. Opening the position
It is 1 April 2009 and you decide to open a long position on Vodafone. The market price is 126.85/126.95.
You go long on 10,000 shares at 126.95p, the offer price.
The margin required to open the trade is 5% or £634.75. The commission on the trade is 0.10% or £12.69 (10,000 shares x 126.95p x 0.10%). There is no UK Stamp Duty to pay.* The price rises throughout the day, and you believe it will continue tomorrow. You decide to hold your position overnight.
Interest adjustments
Interest adjustments are calculated daily, by applying the applicable interest rate to the daily closing value of the position. The annual interest adjustment for a Sterling denominated share such as Vodafone is found by adding the latest one-month LIBOR (London Interbank Offered Rate) to the financing fee.
On 1 April 2009, LIBOR was at 1.0112%, so the annual applicable interest rate on your Vodafone position, assuming a financing fee of 2.5%, would be 3.5112% (LIBOR (1.0112%) + FEE (+2.5%)).
The closing bid price on 1 April 2009 is 127.35p, which gives you a closing value of £12735. The annual interest on £12735 would be £447.15, which creates a daily interest debit of £1.22 (£12735 x 3.5112% / 365).
Dividend adjustments
When you hold a long position and the share goes ex-dividend, the dividend value is credited to your account. In this example there was no dividend, but if there had been, and the amount of the net dividend was 7p per share, £700 would have been credited to your account (10,000 shares x 7p = £700).
2. Closing the position
Despite your prediction, Vodafone begins to fall the following day. By the mid afternoon on 2 April 2009, the market price is 124.55/124.65. You decide to close your position and reduce your losses before the market falls any further. You sell 10,000 shares at 124.55p, the bid price. The commission on this transaction is 0.10% or £12.45 (10,000 shares x 124.55p x 0.10%).
Your loss on the trade is calculated as follows:
| Loss on trade | |
|---|---|
| Closing level | 124.55p |
| Difference | 2.40p |
Loss on trade: 2.40p x 10,000: £240
3. Closing the position
To calculate the overall loss on the transaction you also have to take account of the commission, interest and dividend adjustments. The overall result of the trade is a loss, calculated as follows:
| Overall loss | |
|---|---|
| Loss on trade | £240 |
| 'Sell' commission | £12.45 |
| 'Buy' commission | £12.69 |
| Interest adjustment | £1.22 |
| Dividend adjustment | N/A |
| Overall loss | £266.36 |
Please note that trading CFDs carries a high level of risk to your capital. CFDs are a leveraged product and can result in losses that exceed your initial deposit. Please see our Risk Warning for more details.
*This example is based on the Vodafone margin rate available to Trader Account holders.
'Going Short'
Detailed Example:
1. Opening the position
It is 1 April 2009 and you decide to open a short position on Vodafone. The market price is 126.85/126.95. You go short on 10,000 shares at 126.85p, the bid price.
The initial deposit of 5% or £634.25 is required to open the trade. The commission on the trade is 0.10% or £12.68 (10,000 shares x 126.85 x 0.10%). There is no UK Stamp Duty to pay.*
The market price rises throughout the day, but you believe it will fall tomorrow. You decide to hold your position overnight. At the end of the day, your account is adjusted to reflect interest and dividends.
Interest adjustments
Interest adjustments on short positions are calculated daily in relation to the latest one-month interbank offered rate of the currency in which you are dealing. They also incur a financing fee. Unlike long positions, interest adjustments on a short position can appear on your account as either a debit or a credit, because the financing fee is subtracted from, rather than added to, the interbank offered rate when calculating the adjustment.
Therefore, if you have a position on a Sterling denominated share, and the London Interbank Offered Rate (LIBOR) is greater than your financing fee, the adjustment appears on your account as a credit; conversely, if LIBOR is less than your financing fee, the adjustment appears on your account as a debit.
On 1 April 2009, LIBOR is at 1.0112%, which, assuming a financing fee of 2.5%, means that the adjustment will appear as a debit:
TOTAL = -1.4888% (LIBOR (1.0112%) – FEE (2.5%)
The closing offer price on 1 April 2009 is 127.45p, which gives your position a closing value of £12745. The annual interest adjustment on this value would be £189.74, which creates a daily debit of 51p (£12745 x -1.4888% / 365).
Dividend adjustments
When you hold a short position and the share goes ex-dividend, the dividend value is debited from your account. In this example there was no dividend, but if there had been, and the amount of the net dividend was 7p per share, £700 would have been debited from your account (10,000 shares x 7p = £700). Overall, you do not lose in this situation as the market price of the share will also fall when dividends are paid out.
2. Closing the position
Your prediction is correct and by mid-day on April 2 2009, the market price for Vodafone is 124.85/125.95, and you believe it will not fall any further. You decide to take your profit and close the position before it rises. You buy 10,000 shares at 125.95p, the offer price. The commission on this transaction is 0.10% or £12.59 (10,000 shares x 125.95p x 0.10%).
Your profit on the trade is calculated as follows:
| Profit on trade | |
|---|---|
| Closing level | 125.95p |
| Opening level | 126.85p |
| Difference | 90p |
Profit on trade: 90p x 10,000: £90
3. Calculating the overall result
To calculate the overall profit on the transaction you also have to take account of the commission you have paid and the interest and dividend adjustments. In this example, as you only held the position for one day, you are debited a total of 51p interest.
The overall result of the trade is a profit, calculated as follows:
| Overall profit | |
|---|---|
| Profit on trade | £90.00 |
| 'Sell' commission | -£12.68 |
| 'Buy' commission | -£12.59 |
| Interest adjustment | -51p |
| Dividend adjustment | N/A |
| Overall profit | £64.21 |
Please note that trading CFDs carries a high level of risk to your capital. CFDs are a leveraged product and can result in losses that exceed your initial deposit. Please see our Risk Warning for more details. Please note, IG Markets may hold a position in Vodafone in the ordinary course of business.
*This example is based on the Vodafone margin rate available to Trader Account holders.
Index