Trading CFDs: How the funding of your CFD trading account works
One of the core differences about contracts for difference (CFDs) compared with some other financial products is that there is no expiry date. Single stock futures, for instance, expire every quarter. So with no expiry date, when you trade CFDs, you pay a daily financing charge. So how is this funding calculated? Let's take a closer look…
What is funding when you trade CFDs?
When you trade CFDs
, you need to know about funding
. This is the financing charge you have to pay daily regardless of whether your trade is performing well or not.
When you trade futures, this is already included in the price of the single stock futures contract.
The basis of the funding cost is SAFEY, the research team at FSP Invest
in The Ultimate Contracts for Difference Guide
explain. This is the South African Futures Exchange Yield.
SAFEY is an overnight floating exchange rate. And the funding implications are different depending on whether you put on a long trade or a short trade.
How funding works with a long CFD trade
If you have a long trade on (you buy CFDs), you have to pay the funding charge.
Let’s say SAFEY is 5.5%. Whoever you trade through will also add on a percentage for their commission. This is usually about 2% to 2.5%.
If the overall rate is 8%, this is for the year. To calculate the daily rate, you just divide 8% by 365. At this rate, it’s about 0.022% a day. So you’d pay 0.022% of your position.
The company you trade through will subtract this from your account on a daily basis. And you also have to maintain your margin. If your trade isn’t performing, you may have to pay more in to maintain your margin.
How funding works with a short CFD trade
If you have a short trade on (you sell CFDs), you receive the funding charge.
If the funding charge is the same as above, you’ll receive this into your account on a daily basis.
So there you have it, how the funding of your CFD trading account works.