A big advantage of trading CFDs compared to traditional trading is the fact that the fees are a lot lower. It’s a lot cheaper to trade CFDs. Especially when you trade small amounts, the costs are really low, meaning you can profit from the slightest exchange difference. But how are costs calculated when trading CFDs?
No fixed commission
With traditional trading you usually pay a fixed fee per transaction. When you buy a certain amount of stock with a traditional broker you always pay a fixed fee, no matter the volume. This makes it next to impossible for consumers to trade with just a few hundred pounds, because the fees are too high and there is no leverage to make good money trading with these smaller amounts.
When you start trading CFDs, you will see that the fees will always coincide with the trade that you do. The costs are communicated as the spread, which is formed by the difference between the buy and sell price. When the spread is 2 pips, you pay 0.0002 cents for each unit that you trade. For example, if you trade EUR/USD with a spread of 2 pips, you pay two dollars worth of fees when you buy or sell 1000 euros for dollars.
This means that you can make a profit as soon as the price goes up by more than 0.0002 cents! The fees are so low that you can make money with really small amounts. The fees are always immediately visible, which means you start at a slight loss with CFD brokers.
When you decide to keep a position open until the next day of trading, you pay a certain financing fee. By trading CFDs the broker finances the biggest part of a position using leverage and when the position is kept open for one entire day, that’s free of charge. In other cases a broker may charge you a financing fee.
For short positions you receive a financing fee and for long positions you pay the fee. It’s wise to check the financing terms per instrument and check the costs. The costs are usually calculated based on the market interest minus the broker’s margin divided by 365 (the amount of days in a year).
Financing fees aren’t that high and completely depend on the specific terms of the broker. With Plus500 the fee is 0.0185 percent, which means it costs 7 cents a day. Although trading CFDs is usually done over short periods of time (1-30 days), thanks to these low fees it’s also possible to opt for longer trading positions. On the weekends you pay fees for three days because the exchange closes on the weekends and your positions can’t be closed.