Profit and loss on CFDs: balance explanation
In this article we look at how the profit or loss on investments in CFDs is calculated. It is good to read the article on how the leverage works when you do not yet know exactly how it works. Leverage plays an important role when trading CFDs.
Understanding your balance with an online broker
At most brokers, your balance will be made up of a few parts. Firstly, there is the available balance. The available balance is the part of your assets which is available to invest and which you can use to open new trading positions. Please note that it is important to have enough available funds to support your open positions. If this is not the case, you may incur a margin call.
The second part of your balance is the Profit and/or Loss (P&L). The Profit and/or Loss is calculated by adding up the results of the various open positions. The result of a position is determined by looking at the profits and losses of all open positions. Only when the position is closed the profit or loss is definitive. Let’s illustrate this with an example:
- 500 ING stocks with an outstanding profit of $1200
- 120 Apple shares with a loss of $450
- In this case, your Profit/Loss is $1200 minus $450 which is $750.
The last part of the balance is Equity. The Equity consists of the capital available on your account settled with the open trading positions. If the open positions are positive, the Equity will be higher than the available capital. However, if the open positions are negative, Equity will be lower than the available capital.
- You have $10,000 available and $750 profit, the Equity will be $10,750.
- You have $10,000 available and $750 loss, the Equity will be $9,250.
Initial margin & maintenance margin
With a leverage account, you have to take into the so-called margin into account. There is always an initial margin and a maintenance margin.
The initial margin is determined by the leverage effect. When leverage is one to 10, the margin required to buy or sell a CFD will be 1/10th of the value of the security.
The maintenance margin is then the percentage of the value of the security that must be present in the account to keep the position open. If the balance is insufficient, there will be a margin call after which the position is automatically closed. Read more about the exact operation of a margin call here.