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Canadians can trade a wide variety of instruments, from forex pairs to contracts for difference (CFDs). CFDs are financial derivatives that allow traders to speculate on the price changes of various assets, including stocks, ETFs, commodities, and cryptocurrencies. While speculating with CFDs, you don’t have to buy and hold the underlying assets.
Before you venture into CFD trading, note that this activity doesn’t offer potential profits exclusively. You’ll also need to cover a few critical costs, such as spreads, commissions, and overnight funding fees. You should be familiar with them as they can eat into your capital and returns.
Spreads
Spread refers to the difference between the ask (buy) price and bid (sell) price. Here’s an example: suppose the EUR/USD pair’s buy price is 1.1002 and the sell price is 1.1000. The spread in this case is 1.002 – 1000 = 0.0002. This is also known as two pips, since in trading, one pip is equivalent to 0.0001. This cost is often the first unavoidable expense that traders encounter.
Most regulated forex brokers in Canada earn revenue through spreads. Some have ultra-low spreads, but they require traders also to pay a commission, while others have average spreads and no commission. For instance, while trading forex pairs with AvaTrade, you’ll only be required to cover spreads starting from 0.5 pips on EUR/USD, with no additional commission.
Commission
A commission is a fixed fee that some brokers require traders to cover every time they buy or sell certain assets. For instance, a trading platform might demand you pay a 0.1% commission on every transaction. If you purchase CFDs on stocks worth $1,000, 0.1% of the amount, or $1, will be paid to the service provider as compensation for facilitating the trade.
A good number of CFD brokers charge spreads on forex and commission on assets such as share CFDs and ETF CFDs. Some of the best service providers charge fixed commissions, which you must pay regardless of the trade size. Others have per side commission, meaning you have to pay when you open a position and pay again when you close it.
Overnight Fees
Overnight fees, otherwise known as swaps, are charges that you must pay whenever you hold a leveraged CFD position overnight. While trading your favorite assets on a regulated platform in the Great White North, you can use leverage to control larger positions than what would otherwise be allowed by your actual capital. Leverage is like borrowed money, and it attracts a swap fee whenever you hold a leveraged position overnight.
The actual overnight fees you’ll be required to cover each time depend on various factors, including interest rate differentials, holding duration, and position direction. That said, many brokers allow Muslim traders to open swap-free accounts, which enable users to use leverage without having to cover any interest, including overnight funding charges.
Final Thoughts
Spreads, commissions, and swap fees are the main costs you should be aware of, but they are not the only ones. Some brokers also charge inactivity fees, which are maintenance fees for accounts that remain dormant for a predetermined period. Others have currency conversion and transaction charges. Before trading with any broker, research and evaluate all associated costs. And remember that even minor differences can accumulate into significant expenses or savings over time.
