CFD Fees and Charges Explained

Contracts for difference (CFDs) are risky, which is why many investment professionals advise against using them. Investing in a CFD may appear as simple as transferring money into a trading account as collateral (called a margin in CFD trading).

But in fact, that’s only the first expense you will come up against in your CFD investment journey. If you plan on using CFDs, make sure to count on additional costs related to spreads and transactions, as well as financing and currency fees.

Spreads

A CFD’s spread is the difference between the current cost of buying that CFD (the «offer») and the current price at which the CFD can be sold, commonly known as the «bid». In a spread, the offer price is always higher than the bid price. Brokers work with both fixed and variable spreads, and the model you get will depend on which broker you use.

As a rule, spreads are measured in units known as pips. A single pip generally refers to the very last digit on a CFD rate. The spread indicates how high market rates will have to rise before you can make a profit.

Brokerage fees

Whether or not brokerage fees are included in the spread depends on the type of CFD in question. Typically, you do not pay brokerage fees for CFDs based on indexes or commodities, but you do normally pay brokerage fees when you use CFDs based on stocks or exchange-traded funds (ETFs). Brokerage fees may be a percentage (0.1 percent of each transaction, for example) or a fixed fee (10 francs per transaction, for example). In both cases, there may be a minimum brokerage fee per transaction. You pay brokerage fees both when you open a CFD position and when you close a CFD position.

Financing

Financing charges only need to be calculated into the equation when you hold a CFD overnight. This happens when CFD positions are not closed by a preset cut-off time (11:00 pm for example). The finance charges represent a sort of borrower's fee for the leveraged capital. Much like the interest rates charged on a loan, financing charges for CFDs are tallied based on the number of days or nights for which they are held.

The annual base rates (also known as «reference rates») you get will depend, primarily, on the currency in which your CFD transactions are made. In countries that use the euro, the Euro Interbank Offered Rate (Euribor) sets the standard, while British base rates are used in the United Kingdom. Any markup on base rates is decided by individual CFD brokers.

Daily finance charges for CFDs with a long position are generally calculated using the following formula:

Position size x (interest rate markup + annual base rate) x (number of days / 360)

When trading CFDs with a short position, on the other hand, the annual base rate is credited to you as the CFD buyer:

Position size x (annual base rate - interest rate markdown) x (number of days / 360)

Day trades, meaning trades which are opened and closed in the same day rather than kept overnight, do not accumulate finance charges. The absence of finance charges in day trading is one reason why the majority of CFD trades occur in a short time span, within the same day.

Currency exchange fees are another cost factor to look out for when trading CFDs. As an investor, you can typically select a base currency to be used for your CFD trading account. When you trade CFDs in foreign currencies, every gain or loss those CFDs make will be subject to foreign currency transaction fees. These rates follow a currency exchange spread, the current bid/ask prices for currency trading.

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