CFDs Trading Costs

 Go back to Contracts for Difference FAQs

Cost of Trading CFDs

Q.: What are the costs of trading CFDs?

A: Suppose we take the example of a £100,000 trade in Sainsbury's Plc expecting the security to rise to 415p in the next four weeks.

The current bid-offer spread is Sainsbury's Plc 388.4 - 388.6.

Using an online CFD trading provider you would pay a commission of 0.1 per cent when opening the position and another 0.1 per cent when closing it. Also, for a long position you will be charged interest if you decide to hold a position overnight. This is referred to as a financing charge and is typically based on LIBOR plus 2.5 per cent. This small overnight fee comes to play because for overnight positions the product is considered as an investment where the provider has lent you the money to buy it and is one way a CFD provider makes money from deals.

Buy 25,733 contracts at 388.6p = £100,000.

You deposit £10,000 as margin.

Sainsbury rises from 388.4p to 420p in 25 days.

Initial trade value = £100,000.

Final trade value = £108,079.

Profit = £106,792 - £100,000 = £8,079.

Less opening commission of £100.

Less interest charges of £20.55 x 25 days = £513.75*.

Less closing commission of £100.

Overall net profit = £7,365.25.

Return on capital employed is £7,365.25/£10,000 = 73.65 per cent.

* Assume that this equates to a financing rate of (5% + 2.50%) = 7.5%, and the closing price for the day is 388.6p. You will pay 25,733 x 388.6p x 7.5%/365 = £20.55 for holding the position overnight. This will be debited from your account on the next trading day.

Q.: Do I get charged commission for buys and sells?

A: Yes. The opening and closing trades constitute two separate trades, and therefore you are charged commission for each trade.

Q.: How does the provider make money?

A: Say, your capital is $10k, with CFD margin 10%, so you can 'shop' for $100k worth of share. Assume you want to buy XZY Ltd share at $20 a share, hence you can buy 5000 shares of XYZ Ltd. Also let say you, hold the position for 90 days.

For long position (expecting upturn):
You will need to pay the margin interest: interest rate + 'hair cut'
Say the "hair cut" is 3%, then you need to pay 6.5% + 3%=9.5% for 90 days:
Interest: 9.5% x $100000 (not $90k, because you have to pay interest on the full position) x 90/365 = $2342
(Quick money with solid collateral, they hold the share which is very liquid and if anything
happens to the price you are the one who pays it - so for the CFD provider this is a kind investment that is quite safe with a nice return on investment)

For short position (expecting downturn):
You will be given: interest rate - 'hair cut'
Say you hold short position for 90 days, you will be given:
(9.5% - 3%) x $100000 x 90 /365 = $1602
(CFD provider has $100000 cash from the proceeds and they keep them as long as your position hold - "free money" that they can make use to work for them!)

The CFD provider will pass on the dividend given by the company (usually on ex date not on pay date - at least my provider does that - so faster dividend money than if you hold ordinary share), but you will not have the franked credit - they will enjoy the franked credit. Be careful when you hold short position and it is dividend time, you will be the one who pays the dividend to the owner of the stock that you "borrow".

Q.: My provider charges me 15 basis points each way. But what are basis points and how are they calculated?

A: 15 basis points is 0.15% which is about just right for a contract for difference (although there are some providers like IG Markets who charge 0.10%). If your provider reduced your commission from 0.15% to 0.10% it would amount to a change of 5 basis points. i.e. a basis point is 1/100th of 1%.

Q.: Please provide me with a quick example comparison of buying a share versus cfds in terms of costs?

A: Let's take DGO as a comparison (and IG Markets as the broker).

Share purchase say 5000 shares at £3.40 that's £17000 @ .5% stamp duty £85 plus £10 cost.

CFD 5000 shares at £3.40 that's £0 plus .3% Guaranteed Stop Loss £51 plus £10 cost. (sorry, you must have the margin in your account so if my stop was at £2.00 then £7000 would need to be deposited).

I pay around 8.5% interest pa also to IG. This would equate to £3.96 per day for holding the 5000 shares with them.

To summarize cfd dealing beats share dealing if dealing 90 days or less. But if share hit £2.00 then cfd will be taken out auto (not that my stop is there) shares you are liable to market makers...etc

Q.: Do CFD brokers really allow people to trade index CFDs commission free?

A: Is there something akin to a free lunch in trading? Nay. Same goes for index CFDs; they have a spread on the index you are trading amounting to the difference between the first buyer and first seller. If we look at the FTSE 100 for instance the spread may be 1 or 2 points. The first buyer might be at 5200 and the first seller at 5202; this equals a 2 point spread and thus if we traded at £1 per point, then, buying at 5200 and instantly selling at 5202 would result in a loss of £2. This £2 loss is in effect your brokerage charge. Now try trading 20 contracts with a 2 point spread and your effective commission is £40 to buy and £40 to sell which amounts to £80 for a round-trip. So the logical conclusion from this is that the tighter the bid-offer spread in index trading, then, in general the better the deal.

However, one other thing that you need to consider are overnight financing charges. CFD providers usually charge a financing rate for holding positions overnight which may be as high as the LIBOR rate plus or minus 3% (sometimes more). This means that if you hold a CFD trade for a year you would be charged [3% + LIBOR%] per annum calculated as a daily rate. It is important to note that this financing charge is charged on the whole position size (not just the amount you have borrowed).

 ...Continues here - Do Contracts for Difference have an Expiration Date?