CFDs can be a very cost effective way of investing in the stock market, although of course there are greater risks attached to trading on margin.
10000 x 2.87 = | £28700 |
CFD commission | £71.75 |
Sells 10000 x 296 | £29600 |
CFD commission | £74 |
Net profit: | £754.25 |
750 x 4300 = | £32250 |
Interest receivable | £2.58 |
Buys 750 x 4220 = | £31650 |
CFD commission | £79.13 |
Net profit: | £442.82 |
Trading via a traditional stock broker
Trader B uses his usual stockbroker Piers Dibben-Smythe who charges an extremely commercial 0.15% dealing commission
10000 x 2.87 = | £28700 |
Commission | £43.05 |
Stamp duty | £143.50 |
Sells 10000 x 296 | £29600 |
Commission | £44.40 |
Net profit: | £669.05 |
750 x 4300 = | £32250 |
Commission | £48.38 |
750 x 4220 = | £31650 |
Stamp duty = | £158.25 |
Commission = | £47.48 |
Net profit: | £345.89 |
Comparison in terms of return on equity
A stock trader and a CFD trader are both positive on the outlook for Cadbury Schweppes, trading at 400p. The direct equity investor buys 6,000 shares, pays 0.5% stamp duty and 0.15% commission; the CFD buyer gains 5 times leverage by buying 30,000 CFDs in Cadbury and pays 0.25% commission. Cadbury Schweppes subsequently rises to 450p and in the period between buying and selling the position the stock pays a 5p net dividend. Both positions are open for 20 days.
Stock trader | CFD trader | |
Client funds | £24,000 | £24,000 |
Opening Contracts value | £24,000 | £120,000 |
Commission | £36 | £300 |
Stamp Duty | £120 | |
Financing costs | £460 | |
Dividends received | £300 | £1500 |
Proceeds received | £27000 | £135,000 |
Closing Commission | £40.50 | £377.50 |
Gross profit | £3,000 | £15,000 |
Net profit | £3,103.50 | £15,230.5 |
Return on original investment | 12.9% | 64%* |
* Financing costs for the CFD trader are calculated as follows: With base rates at 5.75%, the CFD trader has effectively borrowed £96000 from the CFD provider at 8.75% for 20 days.
However, the leveraged nature of CFDs could result in increased losses in the event of an adverse move.
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