CFD Meaning Explained With 3 Simple Examples

Financial markets trading may sound complex; however, CFDs (Contracts for Difference) make it more convenient to speculate on various assets without owning them.

In CFDs, you do not actually own a stock or a currency; you just trade on whether or not you believe that the price will increase or decrease. Here are some examples to give you a clear picture of how CFDs work in practice. 

Example 1: Trading a Share CFD

To fully understand the CFD meaning, imagine you are tracking the price of Tesla. The current trading price is 51.630, and the selling price is 51.600. You anticipate that it is going to increase, and you make a purchase of 150 shares of CFDs at a buy price of $51.630.

If your prediction is correct

A few days later, Tesla’s price climbed, and your prediction was right. Now, the selling price is $52.600. To close your position, you will sell them. 

Your profit = (Closing price – Opening price) × Number of CFDs
= (52.600 – 51.630) × 150
= $145.50 (before costs)

If your prediction is wrong:

Suppose Tesla falls instead, with the selling price dropping to $50.500. Closing your position at that level would mean:

Loss = (Opening price – Closing price) × Number of CFDs
= (51.630 – 50.500) × 150
= $169.50

Example 2: Trading an Index CFD

Suppose you want to speculate on the US Tech 100 index, which is trading around 6900. The buy price is 6901.2, and the sell price is 6898.8. You believe the index is heading upward, so you open a trade by buying 100 CFDs at 6901.2. 

If the index rises:

Later, the index price goes up, and the new selling price is 6909.8. You close your position by selling at this level.

Profit = (Closing price – Opening price) × Value per point × Number of CFDs
= (6909.8 – 6901.2) × $10 × 100
= $8600 profit.

If the index drops:

If things don’t go your way and the index falls to a sell price of 6888.8.

Loss = (Opening price – Closing price) × Value per point × Number of CFDs
= (6901.2 – 6888.8) × $10 × 100
= $12,400 loss.

The potential profits can be large, but the losses can mount just as quickly if the market moves against you.

Example 3: Trading a Forex CFD

Forex CFDs are slightly different because they involve currency pairs. For example, trading GBP/USD, which is currently quoted at 1.32585 (buy price 1.3259, sell price 1.3258). You feel GBP is going to strengthen, so you buy five contracts at 1.3259.

Each contract is equivalent to trading £100,000. This means your position size is £500,000. As the margin is 3.33%, you will need to put £16,650 to start this trade.

If GBP/USD rises:

Later, the pair climbs to a new sell price of 1.3318. You close the trade by selling at that rate.

Your new position value = 1.3318 × 500,000 = $665,900
Original position value = $662,950

Profit = $665,900 – $662,950 = $2950 (approx. £3911.41 equivalent)

If GBP/USD falls:

But if the currency weakens and the sell price moves down to 1.31880, then:

New position value = 1.31880 × 500,000 = $659,400
Original value = $662,950

Loss = $662,950 – $659,400 = $3550 (around £4717.60 equivalent).