CFDs are traded on a margin, meaning that rather than paying the full value of your position, as you would in conventional share trading, you just pay an initial deposit. This varies from broker to broker, but usually ranges from 1-10% of the value of your position.

Margin allows leverage, meaning you can access a larger position with your capital than you could without leverage. Because CFDs are traded on a margin, positions held overnight are subject to interest charges - long positions are charged interest if they are held overnight, and short positions may be credited interest. The interest is calculated daily by applying the CFD provider’s interest rate (usually based on the central bank’s interest rate, though this can vary) to the daily closing value of the position.

Going long

When going long on CFDs, the daily interest rate is calculated as follows: (LIBOR + margin)/days in year = daily interest rate

If we use Singapore as an example, let’s assume that the CFD provider is using the same rate as the Monetary Authority of Singapore - currently 0.03% - and that the margin is 2.5%. The daily rate of interest would be:

(0.03% +2.5%)/365 = 0.0069%

To work out the daily interest charges, you would have to multiply the full value of your position by the daily rate of interest.

So let’s say you opened a long position on 1,000 CapitaLand share CFDs, currently valued at $2.75 each. The total value of the position is $2,750 but, as you are trading in share CFDs rather than shares, you only need to pay a 5% margin to open the trade, or $137.50.

Every night you keep this position open, you will be subject to an interest charge:

$2,750 (total value of the position) x 0.0069% (daily rate of interest) = $0.19 a day

This interest charge will change as the value of your position changes, over the length of your position. After four days, the price of CapitaLand shares has risen to $2.95; you decide to take your profits. Your gross profit is calculated as the value of your closing position minus the value of your opening position:

$2,950 (closing position) - $2,750 (opening position) = $200 (gross profit)

Your net profit is your gross profit, minus opening and closing commission charges (CFD providers offer commissions as low as 0.1%, so we’ll use that figure), minus the daily interest charges. If we assume that the shares rose by 5c a day, the interest charges would be:

Day 1 -$2,800 x 0.0069% = $0.19
Day 2 - $2,850 x 0.0069% = $0.20
Day 3 - $2,900 x 0.0069% = $0.20
Day 4 - $2,950 x 0.0069% = $0.20
Total interest charges = $0.79

If we assume there is a minimum commission charge of $25, this would make your net profit:

$200 (gross profit) - $25 (commission charges) - $0.79 (interest over 4 days) = $174.21

Not bad for an initial investment of $137.50!

Going short

When going short on CFDs, traders are generally credited the daily interest charge rather than being debited.

The equation for determining the daily interest rate is calculated by subtracting the margin from LIBOR, and multiplying this by the number of days in the year.

(0.03% - 2.5%)/365 = -0.0068%

The total overnight interest received is still calculated by multiplying the total value of the position by the daily interest rate:

$2,750 x -0.0068% = -$0.19

As the amount of interest received is negative, this means you will still be paying interest on your position, even though you are going short.

If you were trading a market in a country with a higher interest rate, you may receive interest.

So let’s say the interest rate has risen in Singapore and LIBOR is 6% and you are trading City Developments shares on a 5% margin. Currently priced at $10.60, you think the value is going to drop and you decide to sell 1,000 share CFDs. The total value of your position is $10,600 and you pay a 5% margin to open the trade, or $530.

The daily rate of interest would be:

(6% - 2.5%)/365 = 0.0096%

This makes your daily interest payment:

$10,600 x 0.0096% = $1.02

Your prediction was correct and City Developments’ shares fall to $10.30 over the next three days, and you decide to closer your position.

Your gross profit is calculated as the value of your opening position minus the value of your closing position:

$10,600- $10,300 = $300

Your net profit is your gross profit, minus opening and closing commission charges, plus the daily interest charges (as you were going short, you are credited the interest rather than debited). If we assume that the shares fell by 10c a day, the interest charges would be:

Day 1 -$10,500 x 0.0096% = $1.01
Day 2 -$10,400 x 0.0096% = $1.00
Day 3 -$10,300 x 0.0096% = $0.99
Total interest = $3.00

Assuming the minimum commission charge is $25, this would make your net profit:

$300- $25.00 + $3.00 = $278.00

Find out more about CFDs and CFD trading tools by visiting the website of an industry leader. You will get free access to trading tools and the ability to trial the CFD trading platform through a free demo account.

CFDs are leveraged products, meaning you can lose more than your original deposit. CFD trading might not suit everybody, so please ensure you understand the risks involved.

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