One of the subtle differences between trading stocks and trading Contracts for Difference is the CFD Finance part. The CFD finance is an integral part of your trading business and is one of the greatest money earners for the CFD brokers. Today we’ll take a look at how the finance on Contracts for Difference works and what exactly do you pay.
What is CFD Finance?
Contracts for Difference Finance is effectively the amount of money that you borrow when opening up a new ‘long’ CFD position. For example you might buy $10,000 worth of BHP share CFDs and for every day you hold a position overnight (usually taken as 5pm New York time) your CFD broker will debit you a small overnight finance charge.
How much does CFD finance cost and what do I pay?
The amount of Finance you pay does differ from one broker to the next but as a general rule your CFD broker will charge you 2-3% more than your countries official cash rate. So your countries cash rate might be around 3% and you would get charged 5-6% per year calculated back as a daily rate. So on a $10,000 position that is held for 1 night you would pay $10,000 * (3%+2% = 5%) divided by 365 (please note that some CFD brokers will work out the finance over 360 days so check your brokers product disclosure statement for exact details). This works out to be around $1.37 per day and relatively speaking it’s a negligible cost of accessing more opportunity that normally wouldn’t be available with a standard share trading account.