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, whcih 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 certian numebr 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.

Find out about order types for CFDs here.