How to Trade CFDs

  • CFDs are a way of trading the price movements of global financial markets, without buying or selling the underlying instrument directly.  

    As with traditional dealing, CFD prices are quoted as a buy/ask (the price you go long at if you believe market prices will rise) or sell/bid (the price you short sell at if you think prices will fall). You can also use CFDs to hedge your physical portfolio against any potential loss in value.

    A CFD price replicates the price of the underlying instrument, with all City Index CFDs traded in the currency of the underlying market.

    CFDs are traded on leverage, which lets you trade the markets using a small fraction of the total trade value. Leverage means you can potentially magnify your return on investment, but can also result in losses that can exceed your initial deposit. City Index offers a range of risk management tools to help mitigate this risk.

    With City Index you can trade FX, indices, commodities and all non-share CFDs commission free, or all Australian share CFDs for a rate of 0.08% (minimum AUD5).

    CFDs work well as a short-term strategy that can protect your longer-term investments.

    CFD Trading Example: Let's say that you are holding 2,000 OSH (Oil Search Ltd) shares and are concerned about the near-term outlook for oil prices and therefore energy stocks. The current OSH share price is $5.50/51. This level represents a healthy profit for you. These shares are your ‘core’ holding and you’re mindful of other considerations such as tax implications. With all this in mind, you don’t want to sell your OSH shares.

    How can you protect your share holdings using CFDs? By going short with OSH CFDs, you can hedge against share price falls.

    You sell 2,000 OSH CFDs at the bid price of $5.50.

    Opening CFD trade:      Sell 2,000 OSH CFDs at $5.50
    Notional Value:              2,000 CFDs x $5.50 = $11,000
    Commission:                   $11,000 x 0.08% = $8.80
    Margin requirement:    $11,000 x 10% = $1,100

    If OSH shares now fall to $5.00: Loss on long 2,000 OSH shares - ($5.00 - $5.50) x 2000 shares = $1,000
    Gain on short 2,000 OSH CFDs - ($5.50 - $5.00) x 2,000 CFDs = $1,000
    (minus commission of $16.80)

    You should be aware that the reverse effect is also true – if OSH shares rise, any profit on your share holding will be offset by a corresponding loss on your CFDs, and you will be required to provide extra margin cover. In the example above, however, you have effectively insured against a $1,000 loss on your OSH shares for the cost of $16.80 in commission.

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