What are the costs of trading spread bets / CFDs
There are only two costs of spread betting and CFD providers; the spread and financing costs. Providers earn a return as the market maker, taking a margin around the spread between buy (bid) and sell (offer).
What is a trading unit?
On a provider’s platform, one ‘unit’ refers to one CFD contract in the given underlying. It is equivalent to one multiple of the base currency in a given product.
An example for FX products: One unit USD/CAD, USD/CHF or USD/JPY is equal to one USA Dollar.
One unit EUR/USD, EUR/CHF or EUR/AUD is equal to 1 Euro.
An example of futures products: One unit of the FTSE = one multiple of the current price (say 6200.0) = GBP 6200.00
What are Financing Costs?
Whilst it is more than possible to whip in and out leveraged trades in less than a day, some traders opt to roll their contracts over to maximise their chances of getting a good return. This can be a good strategy, but extending the term of the trade can involve financing charges and these need to be taken into account when calculating potential gains or losses.
The Cost of Trading Overnight
Spread bets or CFD trades that are opened and closed on the same day do not attract a finance charge and all of the commission payment is included in the spread. However, if you opt to hold your position overnight, if you have gone long, you are effectively ‘borrowing’ money from your broker and they charge you for the privilege.
For a spread bet or CFD trade that is being rolled over daily, the charge will be applied for every overnight session you opt to hold your position. For long positions you will face a debit, but if you have gone short, your account will actually be credited. There are some exceptions to this rule; if LIBOR is running at a particularly low level, the finance debit will apply to both long and short positions.
The exception to the rolling charges is for quarterly spread bets; these already have the fees for rolling over incorporated. Why not simply plump for a quarterly spread bet and just close out whenever you want, you may ask yourself? Unfortunately, the spreads are far tighter on a daily bet compared to the quarterlies, so it’s a case of balancing the charges against the spread gain and calculating which way you would be better off.
How it’s Worked Out
In spread betting or CFD trades, daily finance costs are usually around 2.5-3%, so if you plan to roll over your position regularly it’s important to factor in the charge. Some providers have a minimum fee, depending on the market being traded.
The rollover charge is calculated by adding the rate from the broker to LIBOR and applying this percentage to the final price your investment closed at and then dividing by 365. This figure is then calculated against your stake to get your daily cost. Conversely, if you had opted to go short the same formula would apply in order to work out what would be credited to your trade.
Finance costs may not sound like a lot when you look at the percentages but for large positions that are going to be rolled over repeatedly, the charges can quickly mount up. This doesn’t mean that all bets should be restricted to within a day, but it is worth keeping an eye on both sides of the scale when weighing up whether to roll over or hold a position. Manage your finance costs but remember they are secondary to most other things.