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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.

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What is a Spread?

A spread in financial trading is the difference between the bid (buy) price and the offer (sell) price of an asset. It represents the cost of trading.

Key Points About Spreads

  • Bid Price: The price at which you can sell an asset.
  • Offer Price: The price at which you can buy an asset.
  • Spread: The difference between the bid and offer prices.

Types of Spreads

  • Fixed spread: The difference between the bid and offer prices remains constant regardless of market conditions. This can be advantageous in volatile markets, but fixed spreads can be higher than variable spreads during normal market conditions.
  • Variable (Floating) Spread: The difference between the bid and offer prices changes with market conditions. During periods of high liquidity, spreads can be very tight (small), while during periods of low liquidity or high volatility, spreads can widen significantly.
Example:

If the bid price for EUR/USD is 1.2000 and the offer price is 1.20006, the spread is 0.00006.

  • Buying at the Offer Price: If you decide to buy EUR/USD, you will do so at the offer price of 1.20006.
  • Selling at the Bid Price: If you decide to sell EUR/USD, you will do so at the bid price of 1.2000.
Importance of the Spread:

Cost of Trading: The spread represents a direct cost to the trader. To make a profit, the price of the currency pair must move enough to cover the spread. For example, if you buy EUR/USD at 1.20006, the price must rise above 1.20006 for you to profit after selling it.

Liquidity Indicator: Tight (small) spreads typically indicate high liquidity and efficient markets, while wide spreads can indicate low liquidity or high market volatility.

Spreads in Different Markets

  • Forex: Spreads in the forex market can be very tight due to high liquidity, especially in major currency pairs.
  • Commodities: Spreads can be influenced by factors such as supply and demand, geopolitical events, and market speculation.

Understanding spreads is crucial for effective trading, as they impact your overall trading costs and potential profitability.

What is Forex Overnight Funding?

Overnight fees are also known as “overnight financing” or “swap rates.” They are calculated based on the value of the open position and are typically applied to positions held past a specified cut-off time, often at the close of the trading day.

  • Forex overnight funding charge = Trade size x (tom next rate + ((Annual admin fee)/365))
Overnight Charges:
  • Long Positions (Buy): When you hold a long position overnight, you typically incur a financing cost. This cost is usually calculated as a percentage of the notional value of the position and is based on the interbank rate (such as LIBOR) plus a markup set by the broker.

    Overnight Charge (Long) = Notional Value × (Interbank Rate + Broker Markup) /365
  • Short Positions (Sell): When you hold a short position overnight, you might either incur a financing cost or earn interest. This depends on the interbank rate and the broker’s terms.

    Overnight Charge (Short) = Notional Value × (Interbank Rate − Broker Markup) /365
Factors Affecting Overnight Charges:
  • Interbank Rates: The primary rate used is often the LIBOR (London Interbank Offered Rate), but with LIBOR being phased out, other rates like SOFR (Secured Overnight Financing Rate) are becoming more common.
  • Asset Type: Different assets may have different financing costs. For example, forex might have different rates compared to commodities or indices.
  • Currency: The currency in which the asset is traded can affect the overnight rate, as different currencies have different interest rates.
Calculation Example:

Suppose you hold a long CFD FX position with a notional value of £10,000 subject to a tom next charge of 0.5% and an admin fee of 1% per annum. The daily overnight charge would be:

Overnight Charge = £10,000 × (0.5%+1%)/365 = £10,000 x (0.00137% + 0.00274%) = £0.41

The tom next rate will vary depending on whether you are long or short, as it reflects the interest rate differential between the two currencies, meaning you will either pay or receive. Whereas the admin fee will apply regardless.