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CFD Financing Costs

Posted By Robert On Saturday, January 25th, 2014 With 0 Comments

Manage your finance costs but remember they are secondary to most other things

Another cost of trading in CFDs is finance in many cases. Some products like Forex, commodities, treasuries and bullion may have the finance factored into the price in another way but most share, sector and index CFDs have finance applicable at the varying rates offered by providers.

Due to the nature of CFDs being leveraged there are also financing costs to be made aware of when trading. Most CFD positions that are held overnight will incur financing costs. Keep in Mind some futures CFD contracts will not incur financing and with FX trading the financing costs received/paid are factored in when rollover occurs.

Some investors getting into CFDs for the first time panic at this cost and may even close a position at the end of each day just to avoid the finance which is usually calculated at or near midnight GMT (Greenwich Mean Time) depending on the respective provider’s rules. The financing charges applicable on any positions you hold at rollover will then be calculated and the amount deducted from your account daily.

Finance is usually applicable on the full position size, irrespective of the margin used. Interest is usually calculated daily and over a weekend you will pay for Saturday and Sunday night rollovers – 2 days interest.

The good news is that financing with CFDs is often cheaper than a traditional margin facility, has less set up costs and less restrictions. If you hold a position in the market for a year with 100% cash, there is a lost opportunity cost which at the very least it would be the percentage return a bank would give you to lock up your funds for a year. Overall, CFDs tend to be better leverage tools than margin loans, however margin loans have their distinct advantages. These include access to franking credits where applicable as you physically hold the share and that your actual interest cost is lower because you only pay interest for the financed amount as opposed to the full position size with CFDs. If in doubt, do your homework on both, taking into account the products you can trade, leverage possible, brokerage rates etc.

As an example of CFD finance, if you held a $10,000 share CFD position (with perhaps $1,000 margin) and the applicable finance is 8%, then this cost attributable to you would be around $2.20 per day in finance. Over 30 days this is $66.00 which is only 0.6% and we would expect any active share to have moved up or down more than this over 30 days. Now it is still a cost, but with cheaper than standard brokerage and often little or no software and data cost, even adding the finance into the overall acquisition and sale cost means the costs are still reasonable.

Like all costs they still need to be minimised. Get the best deal you can and if you were going to close out a position first thing in the morning, you may decide to do it late the day before. Overall, there are many other factors (like the order types available, tighter spreads, faster fulfilment, guaranteed stops etc) that you would value above the end cost of finance.

Financing – Long Position

When trading a long CFD position it is very simple to work out what it is you will be paying in financing. Keeping in mind any intraday trades are not eligible for financing costs.

The Key to working out your financing on a day to day basis is to work out your personal daily financing rate. The equation is below.

Daily Financing RateI have used the RBA rate here as the base rate to keep the example simple and because most providers use this rate but keep in mind this is not always the case. some providers have their own base rate.

Secondly the margin also varies from provider to provider and the type of account you have but they will range generally from 1.5 – 3.5%. For arguments sake in this example we will take the RBA rate as an even 5% and our margin as 2% to work out our daily rate.

Long Finance Position

Now the equation for working out our overnight financing costs on a position is below.

Overnight Financing CostTake note that CFD providers will charge on the full notional value of the position because the margin you put up is the equivalent opf a security deposit then the whole position is being taken on your behalf by the provider. Secondly note when working out the full notional value of your position use the closing price of the stock for that day.

So if we held 100 BHP which closed the day at $35.50 what is our overnight financing rate going to be?

Financing CostIn the scheme of things 68c is not bad at all.

Financing – Short Position

When we are short a CFD instead of paying financing we receive financing. A quick look into the reasoning behind this is because when you go short a CFD you are selling into the market converting stock into cash and therefore a provider will give you financing on that cash minus a margin.

So the equation is nearly the same as in the Long CFD example but this time we are taking away the margin rather than adding it to get a daily financing rate.

Daily Short PositionAgain I have used the RBA rate here as the base rate to keep the example simple and because most providers use this rate but keep in mind this is not always the case. some providers have their own base rate.

As in the last example we will take the RBA rate as an even 5% and our margin as 2% to work out our daily rate.

Financing RateNow the equation for working out our overnight financing costs on a position is below.

Overnight InterestTake note that CFD providers will pay financing on the full notional value of the position because the margin you put up is the equivalent opf a security deposit then the whole position is being taken on your behalf by the provider. Secondly note when working out the full notional value of your position use the closing price of the stock for that day.

So if we were short 100 BHP which closed the day at $35.50 what is our overnight financing rate going to be?

Short Selling FinancingHence the trader receives 29c for holding the position overnight. Make note that the same rules apply for short selling as with taking a long position. This is that all intraday trades will not attract any financing implications, only positions held overnight.

This CFD Turtorial will work through financing on a short position only please see the previous CFD tutorial for the workings of financing on a long position.

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