In this third part of the online CFD course we are going to explain what the CFD trading cost are. The first part was all about what a CFD is and what the advantages were from using CFD. The second part of the online CFD course was about how you could make money with CFD trading. If you want to read part one and part two then click on the two links below.
CFD Trading Cost: Kinds of cost
Before you are placing a CFD there some CFD trading cost that you should consider. At most CFD Brokers you will have to pay a commission fee, spread cost and a holding cost (if you are holding a CFD position longer then one day). However at Plus500, they only charge you the spread cost and a holding cost ( if you are the CFD buyer and if you are the CFD Seller you would receive a interest).
CFD trading cost of commission
When a CFD broker charge you a commission for each trade it will always consist out of the part. The first part of the commission is the minimum fixed commission price which is usually between 7 -9 pounds. And the second part of the commission consist a percentage of a trading value. So basically the higher the transaction trading value is the more commission you pay. Luckily there are some brokers such as Plus500 and Markets.com that doesn’t charge these kinds of commission. If you want to know more about these two brokers then you can check them at our brokers review.
When you are buying and selling CFDs immediately, the spread amounts to the difference between what you paid and what you receive. If you sell share-based CFDs, you will receive interest. So basically when you begin CFD trading you will notice that the transaction fees is always related to your trade. A part of the CFD trading cost is called a spread cost which is the difference between the bid/buy price and ask/selling price.
Let’s say you want to trade in forex and that the spread is 2 pip. So which this means is that you transaction fee is 0,0002 cent per traded unit. If you are trading GBP/EURO with 100 pounds and a leverage of 1:200, your transaction fee will be ( 100 x 200 x 0,0002)= just 4 pounds.
Unlike trading options CFD’s doesn’t have a expiration date. You can hold most of your CFD’s position overnight, weeks or months. However when you hold a position overnight you will be charged interest. This interest is really small but you get charged for it because when you hold a CFD position overnight it will be seen as an investment that has been made with borrowed money. So in this case your broker(lender) have to charge you a little interest.
Let’s say you want to buy Starbucks CFD shares at a price of 50 pound a share with a transaction value of 10.000 pounds and you have a leverage of 1:20. With this leverage of 1:20 you will have to use only 500 pounds of your money instead of 10.000 pounds instantly. And you will hold this position for 10 days and sell those at 60 pounds per share.
So what would be your profit after deducting the CFD trading cost?
Initial trading value was £10.000,- which equals 200 Starbucks CFD shares.
Final trading value (after you have sold your position) is (£60,-x 200 Starbucks CFD shares)= £12.000,-
CFD trading cost = spread opening + spread closing + overnight cost.
spread opening cost= £20,-
spread closing cost= £20,-
overnight cost= the interest rate at most brokers is usually the Libore interest + 2,5%. Let say that the libor in this case was 2,5%. So the total interest rate for a overnight position in total is 5%. The overnight cost will be £10.000 (transaction value) x 5% (interest per night)/365 days= £1,36
The total overnight cost for holding it for ten nights will be £1,36 x 10= £13,69
In this case your net profit will be £12.000 – £10.000 -£ 20 -£20 -£13,69 = £1.946,31
So your return on the investment on CFD trading with only £500 pounds is nearly 400%!
Now your CFD trading cost could be more if the broker also charged you a commission on each transaction that you have made. Fortunately there are a few brokers that don’t charge commissions. One of them is Plus500. If you have any questions regarding this topic, please post them in the comment section below and we will answer it as soon as possible.
Read more about CFD Trading: How to make money with CFD Trading