For the active trader, stock markets have one major disadvantage: it is not easy to go short on shares. When you trade CFDs it is just as simple to go short as it is to go long.
Opening the position
It is August and Telecom Corp is quoted in the market at $2.28/2.29. With IG Markets you can trade in either direction at the market bid-offer price. You decide to sell 5000 shares as a CFD at $2.28, the bid price.
Our standard commission rate is 0.1%, which means you pay a commission of $11.40 (5000 shares x $2.28 x 0.1%) (see Contract Details).
In most cases, because you have a short position, your account is credited to reflect interest adjustments and debited to reflect any dividends.
Interest adjustments
The interest credit on your position is calculated on its daily closing value, using the applicable interest rate.
In this example, the applicable interest rate might be 1.1%pa and the closing price of the shares on a given day might be $2.20. So the closing value for this day would be $11,000 (i.e. 5000 shares x $2.20) and your interest credit would be $0.34 (i.e. $11,000 x 1.1%pa / 360).
Interest adjustments are calculated daily and posted to your account on a daily basis.
Dividend adjustment
In August your position is still open at the Telecom Corp of New Zealand ex-dividend date. The amount of the cash dividend is 6.63c per share and this is debited from your account to reflect the cost of a short position, as follows:
5000 shares x 6.63c = $331.50
Closing the position
By late September, Telecom Corp has fallen to $2.15/2.16 in the market and you decide to take your profit and close your position. You buy 5000 shares at $2.16, the offer price. The commission on the transaction is 0.1% or $10.80 (5000 shares x $2.16 x 0.1%).
Your gross profit on the trade is calculated as follows:
Gross profit on trade
| Opening level | $2.28 |
| Closing level | $2.16 |
| Difference | $0.12 |
Gross profit on trade: $0.12 x 5000 = $600
Calculating the overall result
To determine the net or overall profit on the transaction you also have to take account of the commission you have paid and all the interest and dividend adjustments. In this case you might have held the position for 45 days, earning a total interest credit of say, $16. You have been debited a dividend adjustment of $331.50.
The net result of the trade is a profit, calculated as follows:
Net profit
| Gross profit on trade | $600 |
| Commission | -$22.20 |
| Interest adjustment | $16 |
| Dividend adjustment | -$331.50 |
| Net profit | $262.30 |
Please note that this is a dual listed share, however for the purpose of this example we are quoting prices from the ASX. Also, examples quoted on this page are in Australian Dollars.
Trading CFDs carries a high level of risk to your capital. Please see our Risk Warning for more details.