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Here we review the various costs and deposits required to run a CFD position.
Note that with the following we are looking at a broker that does not charge a ‘brokers fee’ for each trade, in this case the ‘fee’ is already built into the CFD broker’s prices. Therefore the most significant of these costs and deposits is the ‘margin deposit’. Nevertheless you should also take note of the possible dividend adjustments and overnight financing (which can be debited from or credited to your CFD account).
These adjustments/fees are designed to reflect, as closely as possible, the effects of an actual physical purchase (or sale).
CFDs - Trading on Margin
When you trade CFDs you put down a deposit known as a ‘margin’ to open your position, this is calculated as a fraction of the full value of the position.
Companies like InterTrader will attach an automatic stop loss order to each trade and this will determine your margin required to open the position.
CFDs - Trading on Margin Example
Let’s say you buy 1,000 Marks & Spencer CFDs at 500p with InterTrader. The full contract value of such a trade is £5000 (1000 x 500p) and the minimum margin requirement is 3%, so £150.
Whilst the minimum margin required is just 15p out of the 500p you are exposed to, the automatic stop loss is placed at 80% of 15p, which is 12p. So your stop is placed 12p away from your opening level at 488p, meanwhile the trading resources used will still be 15p (£150).
Note that you can still amend your stop loss to a level as long as there are sufficient funds in your account.
Each InterTrader CFD market has a Maximum Computer Generated Stop Level (Max CGSL) which determines the furthest away the CFD platform will place the automatic stop loss (again you can amend this).
The maximum distance the platform will place your stop loss is calculated as 80% of the Max CGSL, so for major UK shares (where the Max CGSL is 10%) the system will place your stop at a distance of 8% of the market price, but your margin to open the position will be 10% of the contract value.
Taking the same example of buying 1,000 Marks & Spencer CFDs at 500p, as 8% of 500p is 40p the system will place your stop loss 40p from your opening level at 460p and your margin to open the position will be 10% of £5000, or £500.
With CFD brokers like InterTrader, if you do not set your stop level when you open your position then the platform will automatically set the stop loss for you. This will be calculated as 80% of the funds available on your account or 80% of the Max CGSL, whichever is the lower. You can alter your stop level once the position is open, but take note that this will also affect your margin requirement on the position. Note that:
a) Not all CFD brokers automatically add a stop loss to your trades.
b) With InterTrader stop loss orders are not guaranteed, unless you specifically select for your stop to be guaranteed. The markets can, on occasion, jump straight through your requested stop loss level, this is known as ‘gapping’. If that happens and the market gaps your trade will be closed out at the next best traded level.
CFDs - Financing Fees
The cost of opening a CFD position is included in the dealing spread, much the same as with spread trading.
While your position is open your account is also debited or credited to reflect the financial cost or benefit of holding the equivalent physical purchase.
For instance, if you held a long position, your CFD account is debited overnight financing, based on the applicable interest rate of your trading currency, for as long as you hold the position. Likewise your account is sometimes credited overnight interest when you hold a short position.
CFDs - Dividends
A CFD account will also be credited or debited to reflect the value of any dividends on shares that go ex-dividend when you have a relevant CFD position open.
If you are long you will receive 80% of the dividend, while if you are short you will be debited 100% of the dividend.
Payment is credited or debited to your account on the ex-dividend date. Dividend adjustments only apply to equity and indices markets.
For worked trading examples see:
InterTrader Account / InterTrader Website
Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.
CFDs Margin, Fees and Dividends, last edited by F. Lawson, 22-Dec-11.
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Warning: Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.
The contents of this website are for information purposes only and not intended as a recommendation to trade nor does the content constitute investment advice. All reasonable efforts have been made to present accurate information. Neither CFDs-Online.com nor any contributing company or individual accepts any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.
* Tax law is subject to change. It can also differ if you pay tax in a jurisdiction other than the UK.
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