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What are the costs of CFD trading?
Meeting your target of making a profitable return from CFD trading benefits from an understanding of the costs involved. Margin and financing charges are likely to be the most direct costs on your trading account. CFD trading uses leverage so whilst your deposit of ‘margin’ allows you to take larger trading positions the cash used to make those trades will be reflected on your account as a debit or credit balance. Put another way, if you deposit £2,000 with a broker platform and instruct them (using leverage) to buy a position with the value of £8,000 then the actual cash debit reported on your account is in excess of your deposited amount of £2,000. The broker will apply financing costs associated with holding that negative cash balance with them. This will be shown as a margin/financing charge and applied to your account daily. The below statement is taken from a Demo account with markets.com The top line of the report shows a position in the CFD WPP which was traded 30th of the month and sold one day later on 31st. As this position was held overnight it incurred one days financing costs of £1.24. The second row shows a position that was opened and closed on the same day. This intra-day trading does not incur financing costs. Further down the report we see the same principles being applied to different instruments where financing costs are applied to trades in UK Futures CFD should positions be held overnight.
Source: markets.com Demo account 20181128
As you’d expect the broker platforms allow you to filter and analyse costs. The below snap shot of the same demo account shows year to date (Ytd) successful trading has taken the capital balance from £10,000 to £12,346.85 with ‘Commissions and Financing’ costs being shown as a Ytd total of £197.84.
Source: markets.com Demo account 20181128
Other costs associated with trading are less direct in nature. Most broker platforms don’t charge commissions on CFD trading but whilst there are no direct commissions applied the spread which is considered in more detail here can be considered a cost. Opening a trade in a position with a large spread can result in a double take when notice your position is immediately in the red and needs to see some favourable price movement to just cover the spread. It’s worth investing some time in comparing the respective broker platforms, particularly the spreads each offer in different markets to ensure you’re trading under the best terms possible. One common error among new traders is the tendency to ‘trade too much’. A clear strategy for the life of a projected trade can not only help with managing market risk but also provide clear entrance and exit points for a trade. Trading CFDs rather than Shares means that some privileges associated with holding Shares in your own name are given up. If you trade into a long equity CFD position it is questionable whether you will receive dividends associated with the stock. This is because it is not your name that is on the Shareholders Register and in the same way you would not be entitled to the voting rights associated with corporate events such as mergers or takeovers. If you follow the policy of most institutional investors you’ll also factor in the ‘cost’ of the interest you could have received placing your margin deposit in a cash savings account. It might not be a material amount with interest rates where they are currently but should be applied if only to carry out best practise. Part of the popularity of CFD trading is that direct costs that are applied are done so relatively straightforward manner. The more opaque costs whilst taken into consideration might not be a significant factor in terms of your actual trading strategy. Ultimately the ‘cost’ with the largest possible impact is the risk of losing some or all, of your initial capital sum. There are a multiple ways this can happen and some are outlined here. [Link to: What are the risks of trading with CFD?] Some might be within your control; some may be out of it, but they need to be considered.