How to Compute for the Costs in CFD Trading?

 


Knowing what is a CFD is as easy as knowing the name of a person but how the way it goes inside should be also known, especially the fees.

The cost of CFD trading includes commission (some cases), financing cost (certain cases), and the spread in which the difference between the price offered at the time of trade and the bid price or purchase price.

·       Commission                                         

Usually, there is no commission in trading forex pairs and commodities. Typically, brokers charge commission for trading stocks.

Example:

A U.K.-based financial services company, the broker CMC Markets, asks commissions starting at 10% or $0.02 cents per share for Canadian and U.S.-listed shares. Since the opening and closing trades are two different or separate trades, each trade is charged for a commission.

·       Financing Charge

If you take a long position, a financing charge may apply. This is due to the fact that overnight positions for products are considered an investment. It means that the provider lent money to the trader to buy the asset. For each day, the position is held, traders are charged an interest charge.

Example:

Trader A wants to buy CFDs for Apple’s share price. The trader puts a trade worth $10,000. The current price of Apple is $23.50. The trader assumes that the share price will increase to $24.80 per share so that the bid-offer spread is 24.80-23.50.

A commission of 0.1% on opening the position is being paid by the trader and another 0.1% when the position is closed. A financing charge overnight will be charged to the trader for a long position as well.

426 contracts at $23.50 per share were bought by the trader. With this, the trading position is $10,011 (also the initial value). Assumingly that the price per share of Apple increases to $24.80 in 16 days, then the final value of the trade will become $10,564.80.

To compute for the trader’s profit before charges and commission, subtract the initial value from the final value:

$10,564.80 - $10, 011 = $553.80

Upon opening the position, the trader pays a commission of 0.1% which is equal to $10. If the interest charge is 7.5% which must be paid for 16 days in which the trader holds the position.

Computation for Interest Per day:

426 contracts x $23.50 x 0.075/365 = $2.06

Total Interest:

$2.06 x 16 days = $32.89

When the position is closed, the trader will pay again a commission of 0.1% which is equal to $10. (0.1% of $10,000).

Computation for trader’s net profit:

$553.80 (profit) – $10 (commission on opening) – $32.89 (total interest) - $10 (commission on closing) = $500.91 (net profit)

Countries where CFD Trading is Available

Knowing what is a CFD and its costs are not enough if your country of residence does not permit it. The U.S.A does not allow CFD contracts. However, CFD contracts are available over the counter (OTC) markets of the following major trading countries:

·         Netherlands

·         United Kingdom

·         Germany

·         Singapore

·         Switzerland

·         South Africa

·         Spain

·         France

·         New Zealand

·         Canada

·         Hong Kong

·         Norway

·         Sweden

·         Italy

·         Thailand

·         Denmark

·         Belgium

In Australia, CFD contracts are currently allowed. Australian Securities and Investment Commission (ASIC) has declared some changes pertaining to the issue and distribution of CFDs to retail clients. The goal of ASIC is to strengthen consumer protections by choosing CFD product features and sales practices that increase retail clients’ CFD losses and by lowering the leverage of CFD available to retail clients. This will be effective starting March 29, 2021.

The U.S. Securities and Exchange Commission (SEC) has restricted CFD trading in the U.S. however, non-residents can use them in trading.

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