Authorised and regulated by the Financial Services Authority

Equity Short

You can go short as easily as you can go long by trading CFDs and can take a negative or a positive view on a share.

What are Equity CFDs?

Equity CFDs are very simple type of derivative. They have been used as an investment vehicle for many years and today account for about 30% of the volume on the London Stock Exchange.

Trading an Equity CFD is very similar to normal share dealing. The CFD is essentially a synthetic equity position and the price of the CFD will exactly mirror the underlying equity price. However you do not have to pay the full value of the shares, instead you put up a deposit (margin) which is normally 10% of the full contract value. The deposit (margin) required will depend on the market capitalisation and volatility of the share.

The contract is revalued at the close of business each day and any resulting margin calls are made. Alternatively, any profit as a result of the revaluation is paid to the client. These monies are credited or debited daily to your margin account.

While your position remains open, your account is debited or credited to reflect interest and dividend adjustments. If you are long you receive dividends and pay interest, if you are short you do the reverse.

Unlike cash equities, equity CFDs have no settlement period and you can keep the position open indefinitely, providing there is enough margin in your account to support the position.

CFDs utilise leverage, and can be very high risk, so they are only available to clients who have the experience and resources to deal in these type of investments.

 

Opening trade

You decide that Vodafone shares are overpriced and are going to fall. You call your trader at Blue Index and execute a trade to sell short at the market price of the underlying shares or better.

Share price of Vodafone	115.00p
Number of shares	10,000
Value of position	£11,500
Commission	-£57.50 (0.005)
Financing cost (position held over 10 nights)	£345

 

Closing the position

 

Share price of Vodafone	105p
Number of shares	10,000
Value of position	£10,500
Commission	-£52.50 (0.005)
Financing cost (position held over 2 nights)*	+£1.10
Total costs	-£108.90
Total monies required to open and close position	£453.90
Total profit after costs	£546.10
Percentage profit	158.2%

 

This example is obviously a favourable outcome.

If the share price had moved against you, the leverage effect would have magnified your losses.

* Overnight Financing

If you hold a Short CFD position open overnight you receive financing based on sterling LIBOR and the closing value of the shares. In this example the financing rate at Blue Index is LIBOR - 3%. LIBOR is 4.75% and the closing price of Vodafone on the day of the opening trade is 115.00p.

So financing charge rebate = 10,000 x 115.00p x 1.75% (4.75% + -3%) = £201.25 per year/365 days = £0.55 per day.