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Costs of trading CFDs

Introduction

Trading CFDs like any other trading instrument is not free. If you are a trader you must know that. The most obvious costs of trading CFDs are the commission charges. Most traders accept the commissions as part of the trading process. The costs that most investors don’t know are the subtle ones such as CFD financing, costs involved in foreign currency exposure, and the spread costs.

All brokers including CMC charge their clients. One of the most popular questions asked by the traders is the costs of trading CFDs because they sometimes seem too good to trust. You may have encountered a broker that advertises low risk commission-free CFD accounts.

Some will even advertise a no loss CFD trading. All these claims are futile, and it is easy to understand why there is much skepticism when dealing with some of the brokers. The truth is that CFD trading has some costs associated with it including the small costs that are often overlooked by most traders.

When you read this article, you will not be skeptical anymore, because you will understand the truth about the costs of trading CFDs. You will not be vulnerable enough to believe the brokers that offer unrealistic deals.

Brokerage costs

Brokers that offer CFD trading charge their clients, though the charges are significantly less than the ones applied to shares.

The charging by different CFD brokerage firms depends on the type of service you receive from the broker. Most CFD brokers charge from 3usd, and the cost increases based on the service you receive. The types of services we are talking about include trading online, hiring an advisory service to execute your trades, or placing your order over the phone. In case you involve the use of advisory services, the trading cost can be extremely high because you give experts the permission to analyze the market for you, and make appropriate trading decisions on your behalf.

Trading CFDs using online platformTrading CFDs online is the cheapest way to trade. Most online brokers will charge a commission of 5 to 10 USD or 0.1%. When you trade higher volumes, you will be given discounts. Figure 1 shows an example of buying a CFD online. From this example, you can see the spread between the bid and the ask price, and the ease of putting the order.

Trading over the phone

The charges that are incurred by the investors when trading over the phone are quite higher than the ones incurred when trading online. Depending on the complexity of your order, you can pay anywhere from 0.125% to 0.35%. Interestingly, there are CFD brokers that will not offer an additional charge for putting your order over the phone.

Charges of using advisory service

The charges incurred when using advisory services are significantly higher than the other types of services. The brokers can offer up to 1% as the cost associated with the advisory service. In case you need a full advisory service, it is better to find the best broker that will make you profit in the market. You need a better compensation for the extra money you pay. To find the best broker that offers a full advisory service, ask for recommendations from your friends, or search for the best brokers in the internet.

Costs involved in accessing opportunities

Financing charge must be paid whether you are trading CFDs or stocks. Financing is an important part of business. Any professional investor understands that opportunities come at a cost. When you trade 5000 USD in the CFD market, you access opportunities that are many times your initial investment.

The brokers charge the CFD financing cost. CFD finance is a small portion of interest, which is debited from the investor’s account when a position is held overnight. As a rule, the open positions that exceed 5.00pm New York time qualify for an overnight CFD financing charge. If you open your CFD position, and close it before 5.00 pm New York time, you will not be charged the overnight financing charge, regardless of the size of your position.

Conclusion

As you have seen, costs are incurred when purchasing CFDs like in any other financial instrument. The costs incurred when buying or selling CFDs are significantly less than the ones incurred when buying or selling shares. As you have seen, there are costs incurred when opening a CFD position using the online platform, over the phone, and when using the advisory services. The financing costs are in the form of overnight interest charges for the positions that exceed a day. It is important to note that the costs are cheap when compared to the huge benefit you can get when trading CFDs.

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