CFD Financing Cost

As CFDs are a margined product where you borrow money from your broker to buy assets it is very important that you understand financing costs associated with CFD trading. Make sure you understand how and when interest for long positions is charged and credited for short positions.

Essentially, most of the brokers use LIBOR (London Inter Bank Offered Rate) as the baseline for financing costs. At times of economic stability LIBOR very closely follows the Bank of England's Base Rate but as banking crisis of 2008 showed it is not always the case.

Your CFD broker will quote something like "LIBOR +/- 2%" which means that long positions will be charged at a rate of LIBOR + 2% and short positions will be credited at a rate of LIBOR - 2%. For example, if LIBOR stands at 2.56% it means that you pay 4.56% for long positions and receive 0.56% for short positions.

It may sound small but over time the charges build up and you still may end up with a loss even if the market goes the way you expected it. Make sure you keep an eye on the Bank of England's Base Rate and take into account the financing costs when you trade CFDs.