Our transaction costs = commission + interest.

1. Commission

Let's say that our CFD broker's commission is say $15 each way, or 0.15% of the trade size, whichever is greater. In our trade that we've described above, where our trade size was $10 000, our total commission would be $15 times 2, which comes to $30.

2. Interest

Let's say that our CFD provider's interest rate charge for long positions held overnight is 7.5% or 0.075 per annum. To calculate the actual cost for our trade that we've just done, we'll need to make it “pro rata”, and then multiply it by our trade size.

Interest = (interest rate for long position per annum) x (days in trade/365) x (trade size), which is 0.075 x 14/365 x 10000, which comes to $28.76.

Therefore our net profit is:

Net profit = gross profit - (commission + interest) = $877 - (30 + 28.76) = $818.24

So that's $818.24 over 14 days, based on $1000 which is the margin required for the trade. The ROI, or return on investment, calculated as a percentage of margin used, is therefore 82% over 14 days.

So now you've gone through an entire CFD trade. Well done!

Remember that for short positions, the interest is paid to you, not charged, so will reduce rather than contribute to the transaction costs.

Something else to note here. The interest charge in our example is slightly simplified because CFD brokers usually calculate the interest charge on the marked to market value of the position on a daily basis. If we did calculated the interest cost using the highest position size ever reached during the trade of 11085.28, the interest would be $31.89. Therefore the real interest cost would be a figure between $28.76 and $31.89. The initial estimate as you can see, is close enough.

So, as you can see, a CFD trade is quite simple in the way it works.

We've gone through a CFD trade from beginning to end. This has illustrated important points about CFD trading for you.

You've seen the effect of leverage in a CFD trade on its returns, as well as exactly how transaction costs such as brokerage and interest for long positions are worked out for a CFD trade. They are pretty easy to understand once you've seen an example.

It is due to the use of leverage, relatively low transaction costs, and convenience of stop losses which are automated, that CFD trading has become a popular trading product.

To find out more valuable tips on trading CFDs, visit the website found in the resource box below.

Page 2 of 2 :: First | Last :: Prev | 1 2 | Next