CFDs – Contracts for Difference – lets you trade on thousands of financial products with relatively low costs.
A CFD is a financial derivative of an underlying asset such as a stock.
CFDs can also be used when trading foreign exchange (forex trading).
This article will outline the costs associated with CFD-trading.
Spread is the difference between the price of buying and the price of selling.
Most financial instruments, have a natural markedsprea, as well as a markup from the brokerage.
If you can buy EURUSD at 1.1050 and sell at 1.1045, the spread is 5 pips.
When trading CFDs, the spread usually makes the biggest cost for traders.
A decade ago, spreads were much higher, but increased competition among CFD-providers has made spread vastly smaller.
The industry standard today is about 1 pip for EURUSD.
The spread cost for buying $100,000 worth of EURUSD, will be around $10.
Financing costs (swap)
Trading with leverage means that you loan margin from your broker.
The broker will charge you a small financing costs each night if you hold your position over night.
This cost is depend on the amount of leverage used and what kind of instrument you are buying or selling.
In some cases the financing costs can be positive – meaning you are getting paid for holding your trade.
Some brokers will charge you a commission when trading CFDs on stocks.
In some cases, they don’t have a markup on the spread, and only charge a commission.
Some brokers, who often target beginners, will charge you both a markup on the spread and a commission.
You should thoroughly check the trading costs with the broker you use.
Trading CFDs has some costs associated with it, but they are relatively small compared to other financial products.
You should always do your own research and shop around to find the best CFD-providers.
Please note that trading CFDs carries a high risk to your capital due to leverage.
In some cases, it is possible to lose more than invested capital.
CFDs are banned in some countries for non-professional clients.
Most retail traders lose money when trading, and you should make sure that the risks are inline with your investment plans.