Interest on CFDs?

noident · 16 October 2009

Greetings all!
I have recently started to trade CFDs via Westpac (rebranded MFG).
The margin on nearly all the stocks that I've taken positions on is 100%, which means that I have to pay the full price of the security.
I've noticed that I get charged an interest which looks a bit excessive to me. I have inquired as to how the interest is calculated and got the following reply:

section 5.4.3 states that interest ‘is calculated as the number of underlying instruments or securities to which a CFD applies multiplied by the closing price multiplied by the applicable funding rate divided by 365’.

The interpretation of the above clause was given to me as:
"the interest is not charged on the amount of funds that you actually borrow to make up the full value but on the full face value of your open positions based on the closing price"

This means that if I open a CFD position with 100% margin for, say, 10,000 (which I have to fork out without borrowing any money from the provider) they charge me interest on my 10,000...
Does this make sense? I thought there would be no interest as I haven't borrowed anything from them (i.e. there's no leverage).

skc · 16 October 2009

noident said:
Greetings all!
I have recently started to trade CFDs via Westpac (rebranded MFG).
The margin on nearly all the stocks that I've taken positions on is 100%, which means that I have to pay the full price of the security.
I've noticed that I get charged an interest which looks a bit excessive to me. I have inquired as to how the interest is calculated and got the following reply:

section 5.4.3 states that interest ‘is calculated as the number of underlying instruments or securities to which a CFD applies multiplied by the closing price multiplied by the applicable funding rate divided by 365’.

The interpretation of the above clause was given to me as:
"the interest is not charged on the amount of funds that you actually borrow to make up the full value but on the full face value of your open positions based on the closing price"

This means that if I open a CFD position with 100% margin for, say, 10,000 (which I have to fork out without borrowing any money from the provider) they charge me interest on my 10,000...
Does this make sense? I thought there would be no interest as I haven't borrowed anything from them (i.e. there's no leverage).

CFD interest is always on full position size, regardless of margin. Also, the interest grows as your position grows. It's calculated daily and not on the "amount you've borrowed" when you open the position.

This is one of the major differences between CFD and margin lending. If you are surprised by that you haven't read the PDS carefully enough.

Westpac (through MFG) is one of the most expensive brokers around. You might as well just go straight to MFG...

noident · 16 October 2009

skc,
thanks for the clarification.
It's weird they'd charge me interest on my own money though...
I will be getting out of CFDs then as I close my positions and buying normal shares.

lukeaye · 16 October 2009

I also assume that you are playing speccy stocks noident? there are lower margain requirements for the more liquid, larger cap stocks. If you are playing speccys then you are doing yourself more harm then good by purchasing them in CFD form.

Interest on CFDs is really high imo. almost makes it not worthwhile if you want to take a position on anything more then 40% margain

noident · 16 October 2009

Yes, playing speccy stocks.
I thought I wouldn't pay interest, and brokerage was cheaper than just buying shares. Good that I noticed the interest straight away, and thanks to you guys for clarifications.
Will be pulling out.

jono1887 · 17 October 2009

is interest charged if you hold after end of day, or is it charged from the moment you open the position?

ie. can you avoid interest when day trading?

when you trade asx cfds, does the asx get your interest of does your provider?

johnnyg · 17 October 2009

lukeaye said:
I also assume that you are playing speccy stocks noident? there are lower margain requirements for the more liquid, larger cap stocks. If you are playing speccys then you are doing yourself more harm then good by purchasing them in CFD form.

Interest on CFDs is really high imo. almost makes it not worthwhile if you want to take a position on anything more then 40% margain

Alot of the shares I'll possibly be trading when I choose a provider are all in the ASX300, however the margin on quite a few are over 40% which makes me wonder whether of not it'll be worth while going with CFD's. You have higher brokerage each way ($8-12.50) and then interest on top. I'm looking into the idea of saving up abit more capital and opening an IB account. With my position sizing I still should be able to have anywhere from 5-10 open positions at once using a $20000 account, trade cheaper each way ($6) and pay no interest. I then would have a Bucket Shop account with $1-2000 for shorting and hedging against long positions.

I need to look into it further, but is one possibility I'm thinking of.

joslad · 17 October 2009

When trading with CFD's, you are only charged interest if

- you hold the shares "overnight", and
- you are trading "long".

If you are trading on the short side, then you earn interest if you hold the position overnight.

If you buy and sell within the same day, no interest is charged or credited on the trade.

If you are trading stocks in the ASX20, for example, you are only required to put up 4 to 5 percent of your own money. So, if you are paying interest on the whole position, then you should be focusing on trading stocks that require the least cash from you.

The margin requirements for stocks can increase markedly for those with smaller market caps. I focus almost solely on the ASX20 and ASX50 stocks that have high liquidity and lower margin requirements.

Brokerage is cheaper with CFD's. You will be paying around .08% and/or a minimum of $8 per trade, depending on who your broker is and your monthly turnover. Also, those who trade frequently will have their monthly fees rebated.

For the experienced day-trader, wanting to make the most of his capital, CFD's are a great product. They are not without risk, however, so you need to choose stocks wisely, follow strict risk management principles etc.

cheers

Bobby · 17 October 2009

If considering index CFD's be aware of the spike play to take out your stops .

Some take these trades with no stop , easy to understand why when going overnight .

jono1887 · 17 October 2009

Bobby said:
If considering index CFD's be aware of the spike play to take out your stops .

Some take these trades with no stop , easy to understand why when going overnight .

Do index CFDs trade overnight??

Bobby · 17 October 2009

jono1887 said:
Do index CFDs trade overnight??

Yes they do .

clayton4115 · 18 October 2009

i trade the index CFD with IG markets, the ASX Cash 200 its called, yes you really should do your homework before you venture into CFD's. They have definite advantages but also alot of downside as well if the trade moves against you.

Interest on CFDs?

noident

skc

Goldmember

noident

lukeaye

noident

jono1887

johnnyg

joslad

Bobby

jono1887

Bobby

clayton4115

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