Costs of trading CFDs
When you trade in CFDs, you have to pay transaction fees. A big advantage of CFDs is the fact that your transaction costs are relative to the amount you trade with. As a result, it is also possible to achieve a positive result when you trade with a small amount. But what costs do you have to pay when you start investing in CFDs?
Where can you trade cost-effectively in CFDs?
When you open many positions, it is important to choose a cheap CFD broker. After all, you pay the fees for each separate transaction. Even at low costs, your total transaction costs can rise quickly. To help you, we’ve listed some high-quality and cheap CFD brokers for you. Press the button below to directly compare the most advantageous brokers:
Do you have to pay commissions?
With most banks, you pay a fixed amount per transaction. When you buy a certain number of shares at your local bank, you always pay a minimum fixed commission regardless of your trading volume. This makes it almost impossible for consumers to invest with a few hundred bucks.
Some CFD brokers also charge a fixed commission. Fortunately, this is often not the case. For the vast majority of CFD brokers, you don’t pay commissions at all when trading in shares. This allows you to achieve good result even with little amounts of money.
When you trade in CFDs, you will directly notice that the transaction costs are always relative to the investment you make. The costs are referred to as spread, which is the difference between the purchase and selling price.
When trading in currency pairs, the spread is often clearly marked. If the spread is 2 pips, it means you pay 0.0002 per unit traded. At EUR/USD, a traded unit is 1000. So, when you trade in EUR/USD with a spread of 2 pips you pay twenty dollar cents in transaction fees (0.0002 X 1000).
This means that you will make a profit as soon as the price rises by more than 0.0002 cents! The transaction costs are very low, so you can also invest profitably with a smaller amount.
You also pay a spread on shares and commodities. At your broker you can always see what the spread is. The exact spread can sometimes be dynamic: this means that transaction costs can increase or decrease depending on the trading volume. It is therefore always advisable to check the spread before opening a position.
It’s important to remember that you pay the spread on every share you buy. With leverage, you can sometimes buy $1000 in shares with $100. You will then pay the transaction fee on the full amount of your trade. When you would open a position on 10 shares of $100 and the transaction costs per share are $0.20 then your total transaction costs will be $1. On a total investment of $100 this would amount to 1% in transaction fees.
When you trade in CFDs, you can use a leverage. Leverage makes it possible to invest on margin. The broker will then finance a large part of the investment for you. When you apply a 1:5 leverage, you only need to put in 20% of the total amount. By using leverage, you can achieve a potentially higher return with a smaller amount of money.
However, the use of a lever is not free. When you apply a lever, you pay financing interest. This interest rate is only calculated if you leave the position open for more than a day. As a day trader, you don’t have to pay any financing costs.
For short positions you sometimes receive a financing premium and for long positions the financing premium is deducted. It is wise to check the financing conditions and costs for each instrument. These costs are often calculated by charging a markup above the market interest rate. These costs are then divided by 365 (the number of days in a year).
The financing costs per day are usually low and depend entirely on the specific terms of the broker. At Plus500 you can easily find the exact financing premium per CFD. In the image, you’ll see an example of what this looks like with Plus500. Although trading in CFDs is usually mainly used for short periods (1-30 days), the low financing costs also make it possible to invest in CFDs for a longer period of time.
Due to the financing costs, CFDs are especially well-suited for short-term investments. Financing costs can significantly reduce long-term returns. It is important to remember that over the weekend you pay the financing costs for three days. On weekends, the exchange is closed, so your position automatically stays open for several days.
The premiums you pay and receive are declared under overnight premium. Illustrative prices.
You don’t have to pay financing fees with every CFD broker. At eToro, for example, you can invest without financing costs if you don’t apply leverage to your investments.
Note the cost of slippage
When you invest, you may have to deal with slippage. When you set a stop loss, you indicate that you want to sell the stock for a certain price. If the market is very volatile, the price can move a bit before the position is actually sold. As a result, the loss on your trading position may be higher than expected.
You can solve this by using a guaranteed stop loss. However, the use of a guaranteed stop loss is not free. You pay for this by, for example, paying a higher spread. Therefore, use this type of stop loss only when you expect high volatility.
Some brokers pay fees for foreign currency investments. Your investment account is always in a certain currency. When you own a euro account, you must first buy dollars before you can buy a share listed in dollars. Therefore, take a good look at how much you pay when you exchange one currency for another.
Beware of other costs
Some CFD brokers can be very sneaky. For example, they charge extra when you want to withdraw the money or if you don’t use the platform for a certain period of time. Therefore, before you open an account, research properly whether the broker charges annoying hidden fees.
How expensive is trading in CFDs in practice?
In this example, we show how expensive investing in CFDs can be. In this example, we invest in oil with a leverage of 1:10. We invest in with an amount of $1000 and the price of a barrel of oil is $40. Our total investment will be worth $10,000. For this amount, we trade in 250 oil barrels.
We pay an immediate spread over the oil barrels. In our test, the spread is 0.08 cents per barrel. We will then pay a total of $20 in direct transaction fees. This amounts to 2% on our investment of $1,000.
We will keep the position in this example open for a week. We pay a night premium – buy 0.0055% per day. In total, we pay 0.0385% in interest on the total amount of our position in one week. Our position is worth $10,000 * 0.0385% which equates to $3.85. As a percentage of our investment, the financing costs are an additional 0.385%.
Our total transaction fees are $20 plus $3.85, which equates to $23.85. On our investment of $1,000 we pay 2.385% in transaction fees. However, we are allowed to invest with an amount of $10,000 and our potential profits are ten times as high. As you can see, trading in CFDs doesn’t have to be expensive at all! We already make a profit with our investment when the oil barrels increase at least $0.40 in value.
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.