To see how the effect of gearing works to amplify your Contract for Difference gains
or losses we'll look at what can happen when you invest $1,000 in CFDs.
Warning: This is a very simplified example. Actual CFD calculations will probably
include commissions, and may include interest payments.
Investment capital $1,000
Gearing 10:1
Share price at the start of the contract $1
Share price at the end of the contract $1.1
Start of contract
Deposit $1,000
CFDs bought $10,000 (Investment capital x gearing)
End of contract
CFDs sold $11,000
Deposit returned $1,000
Price difference of shares between beginning and end of the contract $1,000
Income earned $1,000
Risk & Rewards of CFDs
In a nutshell if you would have made a profit on a share trade, this would have been even higher if you had used a Contract for Difference.
Inversely if you would have made a loss, this would have been a bigger loss if you'd used a Contract for Difference.
Another advantage of CFDs is that the wise investor can make money even when the share price falls.