Plenty of choice but read fine print first
Hidden costs can make comparisons between CFD providers tricky, reports Toni Case
THE CFD industry is so hotly contested that CFD providers have never been more generous in their attempts to lure recruits into the scene. Books and CDs, frequent traders’ discounts and boot- camp style training courses are the types of freebies that CFD providers are showering new clients, encouraging them to put their lucrative trades through them. Indeed, it’s a good time to be shopping for a CFD provider.
CFD providers come in all shapes and sizes, making comparison a little tricky. The important point is to find a CFD provider that suits your needs, which includes such things as the types of securities that you’d like to trade, an appropriate trading platform — will you be trading from home or elsewhere? — plus teaming up with a provider that matches your level of experience. Do you need to be put on a CFD boot camp, or are you already well- versed in the art of trading?
It’s important to line up CFD providers side by side and compare them across the most important features such as brokerage, interest costs, platform fees and risks management tools. The table on this page is a good starting point.
Since the UK is the birthplace of CFDs, a significant number of CFD providers are the offspring of large international parents such as UK- based players MF Global, IG Markets, City Index and CMC Markets, and GFT from the US. Others are local derivatives players such as Sonray Capital Markets, CFD Trading, BrokerOne, Marketech, FP Markets and GET Futures, or household names in the Australian stockbroking scene such as CommSec and E* TRADE.
The costs of trading CFDs include the commission to buy and sell a CFD, daily financing charges, monthly fees for using the CFD provider’s trading platform ( some offer it free, others charge a monthly cost of up to $ 55) and lastly a monthly charge to access live ASX market data. One way to avoid this latter charge is by using 15 minutes delayed data, which is free.
Commission charges on CFDs range from zero to 0.2 per cent of the total position wagered. This is the difference between paying nothing every time you buy and sell a CFD to $ 20 a trade, based on a $ 10,000 trade.
Before you get too excited and start scanning down the list for the cheapest commission, it’s good to remember it’s not quite so straightforward. Cheap commission means little if you’re paying through your teeth for daily financing charges. Since CFDs are a leveraged product — in other words, you’re essentially borrowing funds from the CFD provider to place your trade — you have to pay daily financing charges to the CFD provider for the privilege of using these borrowed funds. Daily financing charges range from 2 per cent to 3 per cent above the overnight cash rate ( roughly 6.75 per cent).
The interest rate calculation is fairly simple: you divide the interest rate by 360 ( not 365) to arrive at the daily financing cost. Based on $ 10,000 at 8.75 per cent, this means that you’ll be up for $ 2.43 each day in interest. The difference of 1 per cent between providers mightn’t seem that much, but it can add up if you make multiple leveraged bets or hold positions over a long period of time. For example, a $ 100,000 exposure held for two weeks would cost you $ 340 at 8.75 per cent compared to $ 379 at 9.75 per cent.
But if you short- sell a CFD — in other words, sell a CFD and then re- buy back later in the hope that the CFD has fallen in price — the CFD firm will pay you interest instead. Referring to the table you can see that most CFD firms will pay you the official cash rate less 2 per cent, or at worst 3 per cent.
The aim, therefore, is to find a CFD provider that charges the lowest interest on the long ( buy) side of a trade, and pays the highest interest rate on the short side.
Unfortunately the tricky bit is yet to come. There are some CFD providers in the market ( not all) who include a spread on a CFD trade. If you don’t know what a spread is, don’t fret — it can be simply explained.
Rather than offering a CFD priced at $ 1.00, some CFD providers will offer this same CFD at $ 1.01 and will keep one per cent for themselves. So if the headline brokerage charged for trading CFDs is 0.1 per cent, and they also charge you an additional one per cent via the spread, you would actually pay 1.1 per cent in commission on a given trade.
Just to clarify the concept of a spread, let’s say that you’re trading Oil Search ( OSH) shares and the offer on your share trading platform is $ 4.37. If you instead wanted to trade CFDs over Oil Search — rather than shares — some CFD providers will offer a price of say $ 4.38 or $ 4.39. The spread’’ is the difference between the real offer in the underlying market and the offer provided by the CFD firm.
So how do you know what you are really paying in commission? Firstly, you need to find out how much brokerage the CFD firm charges, if it charges commission via a spread, or if it has the potential to charge both. And then find out whether the spread is fixed, or whether it can change. A fixed spread is certainly preferable to a spread that can be altered at the CFD broker’s discretion.
If you don’t receive a straight answer from the firm, read their Product Disclosure Statement. Clearly you are at risk of being charged more than you bargained for with a firm that has the right to alter the spread.
Before you can start trading CFDs you’ll have to access a CFD trading platform. Some CFD trading platforms are browser- based, which means that they are accessed via the internet ( the majority aren’t Mac- friendly), while software- based platforms involve installing software onto your hard drive. The advantage of web- based trading platforms is mobility ( as long as you have internet connection you can access it, either in the office or travelling overseas), but there’s a downside if broadband speeds are slow. Although software- based platforms can be restrictive, they are particularly handy if you live in areas where internet is faulty or unreliable.