Derivatives · Intermediate · 4 min

Costs: spread and financing

You can add up the spread and overnight financing of a CFD position and explain why holding CFDs for months can cost more than expected.

The quiet cost

When you open a CFD position, you see the spread right away: the position starts slightly in the red. That is the visible cost.

The larger cost often arrives quietly. Every night the position stays open, a financing charge is taken from the account. For a trade held a few hours, it does not matter. For one held for months, it can eat most of the gain. This lesson adds up both.

Spread + nightly financing

The spread. As with any instrument, you buy at the ask and sell at the bid, as the lesson on spreads explained. CFD providers set their own spreads, which can widen in fast markets or outside main trading hours. Some charge a commission instead of or on top of the spread.

Overnight financing. Overnight financing is the charge for holding a leveraged position from one day to the next. Because the provider effectively lends you most of the exposure, it charges interest on it. Two points matter:

It is charged on the full exposure. The FCA noted that financing is charged on the total notional, with no interest paid on the margin clients post.
Rates vary. ESMA's 2018 analysis gave a typical charge for long positions in non-crypto assets of about 2.5% a year plus a base rate. The FCA's later review found wide differences in the effective rates charged by firms, which they did not adequately justify, and that some firms charged financing separately on matching long and short positions in the same CFD.

Short positions may receive or pay financing, depending on rates and markups. Some providers also charge for holding positions over weekends, similar to the triple swap in forex.

Providers must disclose these charges. In the EU, they must state financing costs and any markup applied, as ESMA's guidance requires.

10 vs. 230

A fictional trader buys an index CFD with an exposure of 20,000 and holds it for 60 days. The provider charges financing of 7% a year on the exposure.

Spread: about 10 for opening and closing.
Financing: 20,000 × 7% × 60 ÷ 365 ≈ 230.
Total: about 240, or 1.2% of the exposure.

The index has to rise more than 1.2% in two months just to break even. A trader who posted 4,000 of margin has given up 6% of it to costs.

Common mistakes

Counting only the spread. Financing often costs more over time.
Holding CFDs like long-term investments. The nightly charge compounds.
Not comparing providers' rates. The FCA found large differences.
Holding hedged positions at the same provider. Both sides may pay financing.

The takeaway

CFDs cost the spread when you trade and financing every night you hold. Financing is charged on the full exposure, so long holds get expensive.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the larger cost for this two-month position.

Tap the chart.

Financing is charged every night on the full exposure. Over weeks, it outweighs the one-off spread.
2On what amount is CFD overnight financing usually calculated?

The FCA noted that financing is charged on total notional, with no interest paid on the margin posted.
3In 2018, what did ESMA describe as a typical overnight financing charge for long CFD positions?

ESMA's analysis gave this as a typical charge for long positions in non-crypto assets at the time.
4What did the FCA find about overnight funding in its review of CFD providers?

The FCA found wide variation in the effective interest rates charged to retail clients.

of 4 correct.