Brokerage On Index CFDs – How Do CFD Brokers Make Their Money?

What is US Dollar Index. When anyone starts trading financial products for the first time, the trading costs involved are one of the most important criteria to consider. That is what makes trading index CFDs such a great product as they are generally commission free.

So the question most people ask is how can CFD brokers allow people to trade index CFDs commission free?

The reason CFD brokers allow you to trade index CFDs commission free is the fact that they have a spread on the index that you are trading. The spread is the difference between the first buyer and the first seller.

If we were to have a look at the Aussie 200 index for example the spread may be two or three points. The first buyer might be at 4000 and the first seller at 4002. As you can see there is a two point spread and so if we traded at one dollar per point then buying at 4002 and selling at 4000 would result in a two dollar loss. That two dollar loss is in effect your brokerage.

Trading Index CFDs

So as you can see there is no commission when trading an index CFD as in this example, but you will notice that if you got in and out when the market had not moved you would suffer a $2 loss. So whilst you may consider that you are getting the product commission free you are in effect being charged a small amount of brokerage. The great thing about this product is that the spread on an index CFD is usually kept to a minimum.

Free brokerage or $100 round trip?

There is no doubt that when you first starting out an index CFD at $1 per point is a brilliant option to consider. However, you can begin to see if you traded 25 contracts at 2 point spread your effective brokerage would be $50 to buy and $50 to sell making it a $100 round-trip.

Given the recent volatility of the Australian market and worldwide markets it becomes easy to see why one dollar per point is a very viable option. Even on the Australian market, which may move 100 points a day, at $1 per point you could be making or losing $100 a day.

Beware excessive overnight financing charges

The other reason CFD brokers are able to provide an index CFD commission free is that they charge an overnight financing rate which may be as high as the RBA rate plus or minus 4%. This means if you are holding an index CFD trade for a year you would be charged 4.25% +4% which equals 8.25% per annum calculated back as a daily rate. Always keep in mind that this financing rate is charged on your total position size which means it can get quite expensive allowing the CFD broker to pocket that finance. Find more information about Forex News Straddling Strategy here.

Todays Stock Market vs. 1938 Stock Market

Over the last several weeks, there have been numerous comparisons made between today’s market and 1938.  As shown below, an overlay of the current S&P 500 over the period of 1936 – 1938 shows two similar patterns in both the decline from the peak and the advances off the lows.  With that in mind, we looked to see how the S&P 500 would have to perform going forward in order to keep the relationship going. 

As shown below, at its peak last week, the S&P 500 rallied 38.2% from the March lows.  In 1938, the S&P gained 50.5% in the four months following its low.  If the S&P 500 were to have a similar rally off of its lows today, it would top out at 1,018.  While breaking 1,000 on the S&P 500 seems remarkable given where we were in March, it is still nearly 200 points lower than where the index was trading before the Lehman Brothers bankruptcy.

Source: Bespoken Research

S&P 500 Pullback Reaches 5%

The S&P 500′s pullback from Friday’s intraday high crossed the 5% level today.  The current pullback is the third intraday pullback of at least 5% since the rally began on March 9th.  With the S&P 500 on pace for its third straight daily decline (another first for this rally), the current pullback is also the longest. 

A key level to watch on the S&P 500 is 875.  The previous pullback in April ended when the S&P 500 traded down to the level of the March peak.  If this decline is anything like the last, we would expect to see support at the peak of the April rally which was 875.  If that level fails to hold, the next area of support comes into play at the 50-day moving average (~825).

Source: Bespoken Research

CFD Index Name Changes

Index Tracker CFD and Stock Index names will be changing. Contract symbols, however, will remain the same. This change will be automatically applied to your trading platform and any open positions. Any workspaces saved with these instruments will also be automatically updated.