CFD Charges and Margins

Charges

There is a financing charge applied daily to the contracts. The rate they are applied at is usually agreed in advance based on the LIBOR or Australia’s Reserve Bank rate or other benchmarks for rate interest. The parties involved in a CFD finance long positions and might get back the funding of short positions instead of deferring sale proceeds. The value of the contract is calculated as difference between the closing and opening trades prices, in cash.

CFDs based on equity usually bare a commission which is calculated as percentage of each trade’s position size. There is also an alternative: trading with market makers and foregoing commissions, with the larger bid or offer being spread on an instrument.

Margin

CFD traders need to maintain a specific margin level as the market maker or brokerage requires. The margin usually ranges between 0.5% and 30%. This way, traders are not forced to put up the entire notional CFD value as collateral, so with a specific amount of money they get to control larger positions, thus increasing the chances of gaining profit, or loss, just as well. However, in a volatile CFD, choosing a leveraged position can get the buyer in a downturn with a margin call and that may end up with the loss of most of the assets.

By using margin, CFD traders have the opportunity to go either long or short on any position. CFD trades have two types of margins:

  • Initial Margin: ranging from 3 % to 30 % for stocks or shares and from 0.5% to 1 % for commodities, foreign exchange and indices.
  • Variation Margin, marked to market.

At first, margin is set at a value from 0.5% to 30% based on the market’s overall perceived risk at that point and the underlying product.

The initial margin is referred to as deposit by many traders. For stocks which are highly liquid and large as it is the case of Vodafone, the starting margin is almost 3% and the deposit may get even lower, depending on how the client is regarded by the firm and on the broker, of course. On the other hand, for a less liquid stosk which is also less capitalized, the margin is near 10 % or even higher.

If a position moves against the client, then we are talking about variation margin. In the case of a trader who buys 1000 shares in the ABC stock and uses CFDs at 100 pence and it turns out that the price gets under 90 pence, then the broker deducts from the account of the client 100 pounds as variation margin, meaning 1000 share multiplied by the 10 pence difference. This is also known as marked to market as it happens in real time. At the other end, in case of a raise in the price by also 10 pence, the client would be credited by the broker with 100 pounds in running profits.

Therefore, variation margin can be either positive or negative for the CFD traders regarding their cash balance.  However, the initial margin is always deducted from the client’s account, being replaced when the trade gets covered.

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