Concepts on Trading CFDs for Newbies: Defining the 3 types of Trading Expenses

 


Money matters particularly expenses are very crucial concepts when a person decides to take part in trading CFDs and other derivatives. I am pretty sure that nobody can certainly ignore learning about the ins and outs of pricing derivatives in the markets because they serve as the foundation for the computation of profits and revenues. For today's dose of CFD concepts for newbies, we aim to primarily supply the needed information to help you understand three concepts that are related to expenses and trading.

Types of Expenses

1. Transaction Cost

In my point of view, this type of expenses is considered as the mother of all expenses because this is where other forms of expenses spring out. Technically speaking, a transaction cost is a payment given to banks and brokers for the rendered service. Some of  these costs cover  agent's commission ,closing costs, title search fees, appraisal fees, and government fees.

2. Trading Cost

For people involved in trading CFDs, it is necessary to note that trading cost for this type of instrument covers payment in various forms. In the case of stock CFDs, clients pay commissions,financing costs and spreads. Since forex pairs and commodity CFDs do not require payment for commissions, brokers usually charge bid-offer spread and sometimes funding cost or interest.

3. Cost of Tender

As an expense designed for derivatives contracts, cost of tender refers to the total of expenses concerning the storage and delivery of the merchandise that is indicated in the contract. The charges for such expense are usually embedded in

into the basis, or difference in price, between the futures contract and the spot market.

The necessity to learn about expenses

Newbies need to learn about expenses because of the following reasons:

1.Financial Management

As a trader, you should be aware that accounting the expenses incurred as you trade will help figure out the effectiveness of your chosen trading strategy. Once  identified that your expenses no longer justify your profits, then it is about time to decide on slashing out some of them and see it the action will help regain your income

2. Computation of Taxes

Some trades require payment of taxes so having a list of your expenses will help you save some of your penny if they are considered as deductibles during the computation of dues.

Tracking your expenses

There are two options that  you can do to track your trading expenses. One is to create your own income statement or you can ask somebody to do it for you. Once you decide to make your own income statement, you should also be prepared to fill out your balance sheet and statement cash flows as these documents are necessary to figure out whether or not your chosen trade is still profitable. To calculate for your net income, you can use the formula Net Income = (Total Revenue + Gains) – (Total Expenses + Losses).

Conclusion:

While it is true that the digital world has instantly created everything including financial  and tracking expenses, it still pays to be knowledgeable  with the traditional computation as this will help you cross check if the expenses that you pay are correctly computed.

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