CFD trading costs and commissions explained.

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All You Need to Know About CFD Commissions

Updated on: 6 January 2020

What is trading? How does trading work? How do I start trading? What are the costs involved? What are the risks?

These are some of the most basic questions about the trading industry that will immediately hit you as a beginner. All equally important, which means your future success depends on having as many answers as you can.

However, this article will deal with only one question – the one regarding the costs of trading. And, from both my personal experience and that of others, I have to tell you that there are quite a few to keep in mind.

Obviously, the first cost that comes to mind is the direct result of a failed trade. Which is synonymous to lost capital. But this is no surprise to anyone, which is why we will only deal with those that are less obvious, because those are where the real danger lies.

The list of all the CFD trading costs

First of all, what you need to know is that these costs are not universal. In the sense that not all brokers have them. Their size may vary as well, also depending on the broker and on the market you decide to operate on.

With this in mind, here are the top trading costs you need to be aware of:

1. The leverage

Here is the problem. The leverage is part of the natural losing mechanism. You lose a trade, your capital takes a hit. So, according to what I said earlier, I shouldn’t be talking about trading losses, because everybody is already aware of those, even beginners, right?

Right. I have to talk about the leverage, however, because of the way it functions. You see, even if it is part of the losing mechanism, what leverage does is multiply your losses considerably. We are not simply talking about losing your capital, we are talking about losing capital you don’t have.

This is one of the main dangers when trading with CFDs and the leverage is the ultimate losing mechanism, if you are ignorant of how CFD trading works.

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2. Commissions

For the most part, CFD assets are commission free. We include here currencies, indices, bonds and commodities. Shares, on the other hand, are not. But the way they are charged depends on the market you are operating on and those details can be found on the platform you have made an account on.

Take note of how shares are charged through your broker, to eliminate all possibilities of unexpected capital leaks.

3. Overnight costs

This is a commission that comes in effect when trading CFDs that have no expiration date in place. The purpose of this fee, that only occurs during night time, is to compensate for the cost of the leverage you are using for extended periods of time.

There are also specific daily costs linked to your short positions, in case your base rate goes extremely low during those times. These details will also differ according to the broker, so make sure you get everything right before signing any contract and opening any account.

4. Charges for the GSLO

GSLO stands for Guaranteed Stop Loss Order. You may already be familiarized with the notion of stop loss orders. These are features that allow you to minimize your losses or simply instruct your position when to terminate. GSLOs, however, function differently than standard stop loss orders.

A regular stop loss order, when triggered, will wait for the next price update before taking effect. Needless to say, this will expose you to unnecessary risks during that timeframe. A GSLO, on the other hand, will immediately take effect when the threshold price is being reached.

All you have to do is to point out a limit price and the position will close when that value pops. Obviously, with a higher degree of security, comes the need for an extra payment. This is why GSLOs are paid services. The way they are being charged, however, depends on the number of units your position holds and the broker’s policy in that regard.

5. Switching to a new futures contract comes at a cost

The futures are trading contracts that specify the date at which a purchase will automatically be made. As the contract specifies, the seller is forced to sell and the buyer is forced to buy at that particular moment in time.

Prolonging the life of your current futures contract by opening a new position can be done, but at a cost. More precisely, you need to pay half the spread to allow the transaction to happen.

6. Regular market data fees

I have used the world regular, but they are not that regular after all. We are talking about the situation where you want to see CFD prices on the Australian and Hong Kong trading markets. In that case, you are required to pay a specific fee, unlike the rest of the markets, for which the fees are 0.

7. The inactivity CFD trading charges

This cost comes with the majority of the brokers, which will start charging your account the moment it starts being considered dormant. Some will charge you for £10 every month, some will do it for less, some for more, but there will be a fee that will come in effect after a certain period.

Usually, the dormant status comes in effect when your account has recorded no trading activities over larger periods of time (usually, a period of at least 1-2 years). The monthly charge will continue either until you resume your activity, or until your account empties out.

So, make sure you remain active. Or close your account, for that matter.

8. Live charts and live price data fees

These are circumstantial fees, meaning that there are specific cases where they don’t apply. Not all brokers use them, but some do. In simple words, if you require access to either live charts, live price feeds or both, you will pay a monthly fee unless you transact a given number of times every week. Usually 3-4 times.

If you don’t then the fees will come into effect.

9. The DMA fee

DMA stands for Direct Market Access and it is free to use for both forex related trades and CFDs. However, accessing the price tags of some shares comes at a cost and you might have to pay a monthly fee for that.

Can I cut some of the losses?

Sure you can. Some of these CFD trading taxes can be easily avoided by paying attention to your contract with the broker. Be very careful what shares you decide to trade with, because, for some, commissions may apply, don’t trade overnight, look for free risk-limit features, like stop loss orders and keep your account active.

Aside from this, it is imperative to research the market and look for the cheapest broker you can get. Not all of them apply the same fees and commissions, so you might be able to find something more advantageous, if you take your time and look for it.

This being said, don’t get scared at how many CFD costs there are. Just follow your game, stay focused and avoid all unnecessary expenses, to the extent that you can.

CFDs Trading Costs and Fees

CFD stands for contract for difference, where you profit from the change in value of the underlying financial security, such as a stock, without ever owning it. As a derivative, you only pay a fraction of the cost of the underlying, which means you are effectively borrowing money and must pay interest on the value. This is just one of the costs of CFD trading, and you need to understand where the money is going so that you can trade profitably.

First, you may pay commission for each trade, and this can be 0.1% or 0.2% of the underlying value. This is charged both for taking the position and for liquidating it, or ‘in and out’. Some CFD providers do not charge commission, and usually these are market makers who will set their own prices. You will find that you pay anyway via the larger spread that is quoted in these cases. The spread is the difference between the price you can buy at, and what you can sell at. For instance, at Ayondo traders pay 0.1% per cent of the trade on the way in and out.

When you hold a CFD position overnight, you are charged interest as mentioned in the first paragraph above. The interest rate is set as a margin over a published rate, such as the London Interbank Offered Rate (LIBOR), and you’ll commonly see about 2 to 3% as the financing rate. Interest is calculated daily, including weekends, and is based on the current value of the underlying. Note that the amount you deposit to take out the trade, the initial margin, does not offset the value of the borrowing; you pay interest on the total value of the underlying. So for example, if you were to take a long trade for a value of $5,000, it would work out at about $0.92 a day, based on an interest rate of around 6.7 per cent. The amount you pay in interest also depends on what your position is at the end of the trading day. If it’s value is less, you pay less, if it’s worth more, you pay more.

If you take a short position, then you will receive interest if you hold it overnight. The interest is paid at the published rate less a certain margin, for example LIBOR minus 2%. Again the interest is calculated daily, including weekends.

Another cost which you may have, depending on your broker, is a charge for the trading platform and/or data fees, and these would normally be monthly payments. Sometimes these payments are waived if you maintain a certain level of activity on your account. There is also an additional premium if you take on a guaranteed stop-loss option – at IG Markets this would cost 0.3 per cent.

An occasional charge or benefit that you may come across when trading CFDs is the dividend. Although CFDs do not give you any ownership of the underlying shares, if you are long on a share CFD when a dividend is due you will receive a cash payment, slightly less than the dividend amount. The opposite applies if you have a short CFD position in equities. You will find that the cost of the dividend is charged to your account on the ex-dividend date. Note that these payments and charges are not made by the underlying company, but by the provider.

When you go long on a CFD trade you are eligible to receive all the dividends that are paid. The costs for going short are reversed – investors receive interest and they have to pay the dividend.

Finally, there may be ongoing costs while you hold a CFD position. CFDs are marked to market each day, which means that the value is updated in your account. If the position is initially losing, then a variation margin will be deducted from your account, and if the position continues to lose you may be faced with a margin call, which means you must put more money in your account as a matter of urgency. The opposite is also true; if your position is making a profit, then your account will be credited on an ongoing basis.

How To Calculate Transaction Costs In CFD Trading

>The costs of CFD trading may be divided up into these components:

1. Commission

This may be a percentage of trade size eg 0.2% or a minimum commission eg $20, each way for trade sizes below a certain amount. Some providers have no commission.

However, their spreads are not the underlying stock prices, but are instead widened (see below).

With DMA CFDs, the prices reflect the underlying market. However the commissions may be different, so check with each CFD provider the details of their market made CFDs and compare it to their DMA CFDs if available.

2. Spread widening

Instead of using the exact underlying share prices for their CFDs, some brokers use a “market made” price with a widening of the spread.

With some brokers, the exact amount of widening is disclosed eg 0.05% but this may differ depending on the market movements and differ between providers.

In contrast with DMA CFDs, the prices reflect the underlying market and an order is placed in the underlying market.

3. Interest costs

For long positions of CFDs that are held overnight, there is an interest charge. For a short CFD position, the interest is paid to you. The interest rate that applies to long positions is usually the base rate plus a certain %, and that for short positions is the base rate minus a certain %.

For example, the interest may be the LIBOR (London Inter-Bank Offered Rate) +/- 2.5%.

To calculate the interest charge for one day, the formula is:

Interest charge for long position = (interest expressed as a fraction) x (1/365) x (position size).

So for a position with a market value of $10 000, and the LIBOR being 5% (hence interest rate being 7.5% or 0.075), then the cost for this particular day would be:

Interest charge for long position = (0.075) x (1/365) x (10 000) = $2.05.

4. Slippage

This is the difference between your intended exit price price and your actual exit price. You may experience slippage depending on the way stop losses are executed by the market maker, the liquidity in the share CFD that you’re trading, and the volatility in the market.

It is a good idea to watch the amount of slippage to make sure that it is not excessive.

If it occurs then check that the stocks that you are trading are not too illiquid or have a low turnover, which may be a cause of the slippage. On the other hand, slippage may be caused by gapping in the prices overnight, known as ‘overnight’ risk.

5. Other fees eg data fees

For some providers, there are monthly data fees, or platform fees as well as the above costs. Some of these fees are lowered or nil if you trade more than a certain number of trades per month.

Note that for some brokers, that the costs, such as commissions and spread widening may be negotiable, or they may be lower if you belong to an educational CFD trading group.

So keep these points in mind when choosing a CFD provider.

An Introduction To CFDs

The contract for difference (CFD) offers European traders and investors an opportunity to profit from price movement without owning the underlying asset. It’s a relatively simple security calculated by the asset’s movement between trade entry and exit, computing only the price change without consideration of the asset’s underlying value.   This is accomplished through a contract between client and broker, and does not utilize any stock, forex, commodity or futures exchange. Trading CFDs offer several major advantages that have increased the instruments’ enormous popularity in the past decade.

How a CFD Works

If a stock has an ask price of $25.26 and the trader buys 100 shares, the cost of the transaction is $2,526 plus commission and fees. This trade requires at least $1,263 in free cash at a traditional broker in a 50% margin account, while a CFD broker formerly required just a 5% margin, or $126.30. A CFD trade will show a loss equal to the size of the spread at the time of the transaction so, if the spread is 5 cents, the stock needs to gain 5 cents for the position to hit the breakeven price. You’ll see a 5-cent gain if you owned the stock outright but would have paid a commission and incurred a larger capital outlay.

If the stock rallies to a bid price of $25.76 in a traditional broker account, it can be sold for a $50 gain or $50/$1263 = 3.95% profit. However, when the national exchange reaches this price, the CFD bid price may only be $25.74. The CFD profit will be lower because the trader must exit at the bid price and the spread is larger than on the regular market. In this example, the CFD trader earns an estimated $48 or $48/$126.30 = 38% return on investment. The CFD broker may also require the trader to buy at a higher initial price, $25.28 for example. Even so, the $46 to $48 earned on the CFD trade denotes a net profit, while the $50 profit from owning the stock outright doesn’t include commissions or other fees, putting more money in the CFD trader’s pocket.

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