How CFDs Are Priced
CFD pricing is something that can vary from broker to broker (although refer to On Exchange vs. Off Exchange below for an important distinction). Understanding whether you’re getting a good deal isn’t easy, but knowing that there is sufficient transparency in the way prices are computed can at least offer some peace of mind, and for the most part that is the case with CFD trading. CFD prices track the base market, or the futures market depending on the circumstances, to give a roughly proximate link to ‘real world’ underlying prices. However, the CFD broker will usually also factor in a ‘fair value’ discretionary component, whereby the price can by weighted to even out anomalies in the underling market value.
What Determines CFD Pricing?
This then transpires to suggest that CFD pricing is determined by the underlying market for the particular asset or index concerned. The fair value component serves to act as a correcting mechanism through which the broker can compensate for factors not weighted in by the markets, effectively designed to serve as a handicap to the trader against dealing in the cash market directly. So, if the broker has reason to believe a position will rise, it might adjust the price of the CFD upwards relative to the underlying or futures market to account for this increased probability of outcome.
How Are CFDs Charged?
CFDs are charged by brokers in two main ways. Firstly, commission is set as a percentage of the total transaction size on both the opening and closing of each position. Expressed as a percentage, usually around 0.2% on each end of the transaction, the commission portion is charged on the total size of the position, although still remains proportionately lower than the fees charged in other areas of the brokerage sector. The second main way in which CFDs are charged is indirectly, as a result of overnight financing charges on leveraged positions. This is applied at usually around 0.03% on a daily basis, at the close of the market each day, and is notionally a charge to fund the leveraged portion of the trade.