MF Global

For the active trader, stock markets have one major disadvantage: it is not easy to go short. When you trade Contracts For Difference, it is as easy to go short as to go long. This example shows how you can use a CFD to achieve the same economic effect as selling a share short.

Opening the position

It is March and you think XYZ is about to fall. The share is quoted in the market at $3.71/3.72. You sell 10,000 shares as a CFD at $3.71, the bid price. The commission on the transaction is 0.125% or $46.38 (10,000 shares x $3.71 x 0.125%). The margin requirement is $3,710 ($3.71 x 10,000 x 10%).

Because you have taken 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 daily, by applying the applicable interest rate to the daily closing value of the position.

In this example, the applicable interest rate might be 2.25% and the closing price of the shares on a particular day might be $3.70, giving a closing value of $37,000 (ie. 10,000 shares x $3.70).

So the interest credit for the position for this particular day would be $2.28 (ie. $37,000 x 2.25% / 365).

Interest adjustments are calculated daily and posted to your account on a weekly basis, or more frequently on request.

Dividend adjustment

At the end of April your position is still open at the time of the XYZ ex-dividend date.

The amount of the declared cash dividend is 9c per share and this is debited from your account. The adjustment is calculated as follows:

10,000 shares x $0.09 = $900

Closing the position

By early April, XYZ has risen to $3.97/3.98 in the market and you decide to cut your loss and close the position. You buy 10,000 shares at $3.98, the offer price. The commission on the transaction is 0.125% or $49.75 (10,000 shares x $3.98 x 0.125%).

Your loss on the trade is calculated as follows:

Loss on Trade

Closing Level $3.98

Opening Level $3.71

Difference ($0.27)

Loss on Trade: $0.27 x 10,000 = ($2,700.00)

Calculating the overall result

To calculate the overall loss on the transaction you also have to take account of the commission you have paid and the interest and dividend adjustments. In this example, you might have held the position for 65 days, earning a total interest credit of, say, $148.20. You have been debited a dividend adjustment of $900.

The overall result of the trade is a loss, calculated as follows:

Overall Result

Loss on trade ($2,700)

Total Commission ($96.13)

Interest Adjustment $148.20

Dividend Adjustment ($900)

Total Loss on Trade ($3,547.93)