How long positions are managed
At the close of business every day, all CFD position are re-valued by the CFD provider and any profits that result from this valuation are credited to your trading account, while losses are debited from your account.
Where you decide to hold a position overnight, a financing expense then come into play.
Holding a CFD beyond the close of trading on any day that you have acquired it as a long position ? where you expect the price of the investment to increase ? will sees the product treated as a investment where the provider has lent you the money to buy this.
As a result, the provider will charge you a financing interest charge. This is one way a CFD provider makes money from you.
The financing charge is based on the Reserve Bank cash rate plus an extra premium that is generally between 2 and 3 per cent, although active traders can often negotiate a more favourable rate.
The interest financing charge is calculated by multiplying the number of CFD positions by the closing price of the investment and then further by the financing charge divided by 365 days to convert this to a daily charge.
Each day a CFD long position is held it will face a financing charge.
For example, what will be the daily charge where the investment over which you have acquired some CFDs is worth $15,000?
The financing will be worked out as follows:
Step 1: Determine the closing price value of the investment over which you have CFDs, says $15,000.
Step 2: Calculate the financing charge by adding the provider?s premium (say 2.5 per cent) to the RBA cash (say 3 per cent).
The total in this instance will be 5.5 per cent.
Step 3: Multiply the investment value by the financing charge:
= $15,000 times 5.5 per cent equals $825.
Step 4: Divide the result by 365 to reduce this to a daily charge
= $825 divided by 365 = $2.26. This is how much you will pay to hold the investment for this particular day
CFD financing on long positions is charged daily, which is understandable given the value of the investment will very likely fluctuate. If the value of the investment increases to $16,000, the overnight financing charge will be $2.41.
Frequently Asked Question
It?s like a new trade every day
Because CFD financing charges are levied daily and take you back to a square position at the end of each day, holding a CFD position is like placing a fresh order at the going market price when the next day?s trading begins.
The major difference is that the commission that is charged when you open a position is only changed when you open or close a trade.
