How short positions are managed

All holders of long CFD positions pay a financing charge that is calculated daily to the CFD provider.

This charge is generally between 2-to-3 per cent above the Reserve Bank cash rate.

But where a trader acquires a short CFD position ? meaning your expectation is that the investment will fall in value ? what the provider organises is a short position in the investment.

What this involves is the provider borrowing the investment from someone else who is willing to lend this to you for the period you want to be involved.

Part of the short selling arrangement is paying the investment lender an interest charge that is all organised as part of the CFD package. As the new but temporary holder of the investment you can then (via the CFD provider) sell this on the market.

You (or the CFD provider more correctly) receives the proceeds from the sale although what you actually get is an interest payment calculated on the investment position at the market value.

The interest income you receive is the Reserve Bank cash rate minus the premium charge. Say this is 2 per cent.

The short position income entitlement will be worked out as follows:
Step 1: Determine the closing price value of the investment over which you have CFDs, says $15,000.

Step 2: Calculate the financing charge by subtracting the provider?s premium expense (say 2 per cent) from the RBA cash (say 3 per cent).
The total in this instance will be 1 per cent.

Step 3: Multiply the investment value by the financing charge:
= $15,000 times 1 per cent equals $150

Step 4: Divide the result by 365 to reduce this to a daily charge
= $150 divided by 365 = 41 cents. This is how much you account will be credited each day as a short position holder.

With short CFDs it is still necessary to pay an initial margin deposit to cover the possibility that the direction of the trade will go against you, meaning the price of the investment rises.

Short CFDs are profitable when the price of the investment on which the CFD is based falls in value.

This creates the opportunity for you to buy the investment back at a lower price, return the investment to the lender and pocket the difference.

Of course none of the technical obligations of borrowing investments, selling them and then buying them back are place on the trader.

This is all handled by the CFD provider.

Frequently Asked Question
A long term signal
A significant proportion of CFD traders are guided by market indicators. One popular long term indicator of market trend is the 200 day moving average.

In early June many global share market indices broke above their 200 day moving average for the first time since January 2008.

This saw traders feeling more comfortable about the prospects of markets entering a long term upwards trend.