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CFD trading cost: How to calculate it in simple steps

Hi all,

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.

Part 1 of the online CFD course: CFD is one of the greatest investment instrument for trading

Part 2 of the online CFD course: How to make money on CFD trading in a simple way

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.

Spread cost

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.

Example:

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.

Overnight cost

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.

Example:

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

Make money on CFD trading in a simple way

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cfd trading

In this CFD tutorial I am going to explain on how you can make money with CFD trading.Now if you don’t know what a cfd is then you should read this article: What are CFDs?

The possibility that cfd trading gives to a trader

One of the reason that I like CFD trading so much is that it gives you so much possibilities to trade. You can use cfd trading to make a trade in forex, shares/stocks all over the world, top Indices, commodities and all kinds of funds. For example if you don’t see any opportunities to make money in the FTSE then you can always look to the German market and see if Volkswagen share fits your requirement to make a decent profit. Or you can trade in gold by using cfd trading if you believe that gold market gives a  good opportunity to make a profit.

CFD Trading Step 1

The first thing you need in CFD trading is CFD broker. Its vital that you choose a good cfd broker. Because unfortunately there are still some brokers around that are scam. To avoid off getting a scam broker, you should take a broker that has licenses from Financial Authorities. In our brokers review you will find what our experiences are with different brokers. Our top picks at the moment are Plus500 and Markets.com. You can the reviews here: Plus500 Review & Markets.com Review.

CFD Trading Step 2

After you have open a CFD trading account or if you already have one then it is time to make some profit. Here is the first thing that you should do. Create a trading plan. A trading plan is a simple plan where it states why you want invest or trade  in this object and at which price point you should get in or get out. One of the best way of determine a buying point is to use make use of the horizontal lines and trend lines. By using both U can pinpoint the price point where you should enter the market (buy the object) or leave the market (selling the object). If you want to know more about buying signales and selling signales then read this article: buying & selling signals.

Protect the down size risk

Have you ever heard of the first two rules of Warren Buffet in investing?

Rule nr.1: Never lose money

Rule nr.2: Never forget rule number One!

I love that rule. That’s why I always use a stop loss order to limit my potential loss.

cfd trading limit potential loss

cfd trading limit potential loss

By using a stop loss order, I am in control of my risk management. Meaning that I can control my potential losses and keep it small when the trading doesn’t work out well. And when it works out well I can make a huge profit while my loss is small.

A CFD trading making money extra tip: Use a stop loss order to protect your profit.

A stop loss order is used to keep you from losing money but it can also be used to secure your profit. Let’s you say your current trade is making a profit. Then all you need to do is to move up the stop loss order.

Example:

Let’s say the stock that you have bought at 20 pounds currently has a value of 35 pounds. The best thing to do now is to move the stop loss order to a price of 33 pounds. This way if the stock suddenly drops in price to 25 pounds, you will still have a profit of 13 pounds instead of 5 small pounds. If you have bought the stock with cfd then you profit will be a lot bigger then 13 pounds per share because of the leverage.

 

 

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