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 underlyong stock prices, but are instead widened (see below). So take this into account.

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%.

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.

5. Other 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.

Note:

All trading involves a high risk of financial loss, and the information on this site is for general information purposes only and is not financial advice in any form. See your own financial advice before taking any action.

All forms of trading involves risk of financial loss.

Also note that CFD trading is not legally permitted in some countries.

Note that this site may have paid advertising or commissions generated for referrals to products and services, and CFD providers made from this site.

See our disclaimer for further information.





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