Say you want to speculate on the price of the Nasdaq. You’d need to use a type of derivative, in a trading platform, to do this.
After some thought, you decide to use CFDs to take out a longer-term position predicting what the Nasdaq will do in the future – this is called a futures contract.
If you think the Nasdaq exchange is set to rise over the coming weeks, you’d buy a futures contract (also known as going long), but would sell (go short) if you thought the Nasdaq’s price would fall.
Let’s assume you think the Nasdaq will appreciate in price. So, you decide to go long, with $100 that the exchange’s market price will go up by your futures contract’s expiry date. If the exchange’s price does go up by 5 points, you’ll make a profit of $500 ($100 x 5 points). If the Nasdaq’s price falls by 5 points, you’d make a loss of $500 instead.
Hedging
Let’s look at an example. You think the price of Brent Crude may go down, so you want to hedge your oil shares with us using CFDs. So, you go short on 10 Brent Crude oil CFD contracts. CFDs are calculated based on the difference between the market price when you open your position vs when you close it, and a single standard Brent Crude oil contract is equal to $10 per point.
So, for each point the Brent Crude price falls, you’d make $100 ($10 multiplied by 10 contracts). Likewise, for every point that the oil price appreciates, you’d make a $100 loss.
