For example, if you buy (go long) oil at an opening price of $50 a barrel and close the trade out at $51 a barrel, the $1 difference in the open and close price is the basis for calculating your profit. Likewise if the trade was closed out at $49 a barrel, you would have a $1 loss as the basis for your loss.
CFDs are a leveraged product, which means you only need to deposit a fraction of the total value of trade. This margin requirement is essential to understand and it’s worth remembering that because of this your losses can exceed the deposited amount.
Therefore, if you were trading oil you might buy 1,000 CFDs at $50 a barrel, meaning you would control a trade worth $50,000. On a typical margin requirement of 100:1, this would mean you would need to have $500 in your account to open this trade.
If oil rises to $51, to calculate your profit, you simply multiply your 1,000 CFDs by the $1 difference = $1,000. Likewise, in this example if oil slid to $49 you would face a loss of $1,000. This highlights the effect of leverage – a relatively modest 2% move in the price of oil results in either a profit worth double your account deposit, or a loss worth double your account balance. Leverage magnifies gains and magnifies losses.
You must remember that some CFDs incur a small overnight financing chart, while CFD equities are carry a commission.