Overnight financing, while being one of the most important parts of CFD trading, is often one of the most overlooked. As such, this lack of awareness can lead to traders being overcharged on financing a deal.
Financing is necessary because when you open a share or cash index CFD, you are gaining exposure to a position many times your deposit – you are effectively borrowing the underlying value of the asset.
As such, you are charged a financing cost on the full value of the underlying asset, for each day that you hold the position.
How Much is Charged?
The cost of borrowing is based on the relevant interbank rate for the market traded. In the example below, for a Singaporean stock, the interbank rate would be SIBOR (Singapore Interbank Offered Rate), and would be added to the broker's base rate.
Every broker's financing rate has to take account of the interbank rate – even if an inclusive rate is advertised. At IG Markets, we offer a very low SIBOR +/- 2.5%). Other brokers can charge as much as SIBOR +/- 5 or 6%.
With IG Markets, the charge is always the interbank rate plus or minus 2.5%.
The daily financing cost is calculated using the equation below:
Daily interest adjustment = n x p x f/365
n = number of shares or contracts
p = day's closing price
f = financing rate
How is Financing Applied?
In this example, a long position on 15,000 Singapore shares is held for 15 and 45 days, and the financing rate is calculated and applied daily. For simplicity's sake, this position opens at $10.20 and stays at that level for 45 days, so the closing price each day is $10.20.
IG Markets' base daily interest adjustment (excluding SIBOR) is 15,000 x $10.20 x 2.5%/365 = $10.48
| Broker | Rate above IG Markets | Funding cost | Days | Extra funding cost |
|---|---|---|---|---|
| IG Markets | 0% | $157.19 $471.58 |
15 45 |
$0 $0 |
| Broker 1 | 1% | $220.07 $660.21 |
15 45 |
$62.88 $188.63 |
| Broker 2 | 4% | $408.70 $1226.10 |
15 45 |
$251.51 $754.52 |
| Broker 3 | 6% | $534.45 $1603.36 |
15 45 |
$377.26 $1131.78 |
So, the total financing cost for this position held with IG Markets for 45 days is $10.48 x 45 = $471.58
The, total financing cost for the same position with Broker 2 is $27.25 (15,000 x $10.20 x 6.5%) x 45 = $1226.10
This example shows the difference in base financing rates between brokers and therefore excludes SIBOR, which would be added to all. For an indication of the interbank rate, please see the MAS's Financial Database.
Financing Short Positions
Holding a short position means it is possible for the charge to be credited to your account, provided the financing rate is a positive value. However, in this economic downturn, interbank rates are hitting historic lows, which means the rate is rarely positive. When this is the case, a negative rate is applied to your account - a debit.