CFD trading explained

CFDs work in a very similar way to SpreadBetting. They can be a flexible and cost effective way to trade a wide range of financial markets. CFD means Contract for Difference and your profit or loss on a CFD is determined by the difference between your buy price and your sell price.

Individuals may be subject to either capital gains tax or income tax on gains or losses arising from CFDs or FX movements, depending on whether they are treated as carrying on a trade. Independent professional advice should be taken based on your own facts and circumstances.

The best way to explain how CFDs work is through an example:

1. ABC Corp is trading at 1.59/1.60 and you think the price is going to rise in value.
2. You decide to go long, so you buy ABC Corp at 1.60
3. You decide to trade 1000 CFDs and are charged £20 commission.
4. You now own 1000 CFDs with a value of £1600.
5. Your margin requirement with RBS Spread Trading for ABC Corp is 5% therefore £80 will be allocated from your account against this trade as initial margin. Remember if the share price moves against you, it is possible to lose more than this £80 initial margin.
6. Two days later you see that ABC Corp has risen to 1.85/1.86.
7. Therefore you choose to sell at 1.85 and realise your profit and are charged £20 commission.
8. You bought at 1.60 and sold at 1.85 which means ABC Corp rose by 25 points 25 x 1000 shares = £250 profit.
9. You held the position for two days which means you incurred two nights financing charge. This equals £1600 (value of the position) x LIBOR + 2.5% (which in this instance = 8%) /365 (number of days in the year) x 2 (number of days position is held) = 0.70p.
10. The financing and commission is deducted from the profit, giving you a profit of £209.30.