Pretty important actually, so if you hold positions for a few days or run long term long/short leveraged portfolios read on…
I remember years ago when I was trying to get my first job as a broker I made a bunch of call back requests to the major brokers and had the sales guys pitch me what spread betting and CFD trading was.
Of course I knew, as I’d been trading pretty much since school, but I thought it would give me an edge during the interview process. It didn’t because I’m a hopeless salesman…
One broker (who shall remain nameless and is not featured on the Good Broker Guide) said that financing charges are so small that it’s hardly worth considering them in your P&L calculations.
To be fair, he, as a broker probably didn’t really care about them because sales traders get paid on commission splits and don’t (unless they are superb negotiators) get a split of the financing income they bring in.
But financing charges are not small, and this was 15 years ago when they were 3% over/under 1 month LIBOR was around 5%. So on long positions you’d get charged 8% on the value.
Which means if you have £100k in exposure you’re getting billed £8k per year in overnight financing.
If you are full leveraged on FTSE 100 stocks at 5% margin that’s £3k more than your account balance.
Back then, if you were short you would collect interest payments on short positions, but now that LIBOR is so low you’re actually paying interest on short positions (the broker does have to borrow the stock and there are costs associated with that so it’s reasonable to pass these on to the customer, but it’s worth considering).
Bear in mind that back then commission could be 0.5% (the stamp duty equivalent) as opposed to a fairly standard 0.15% on CFD trading and spread betting spreads.
If you’re following a trade guru with a social trading broker this is particularly relevant
What’s also interesting about financing charges is that whilst the entire industry is in a race to the bottom of commission costs and spread width, financing charges don’t seem to have moved at all.
Most brokers still charge around 2.5% over/under 1 month LIBOR and you’ll have to have a pretty decent account to get them any lower.
It’s just one of those charges that no-body really knows about, or cares about until they add up how much they have been charged. Classic salami tactics.
Brokers who hedge positions have to buy the stock and they have to borrow the money for that from somewhere. They can’t use client funds as they are segregated for retail OTC traders so they are paying to finance the position and adding a mark up.
So, if any broker every tells you that financing charges shouldn’t be included in your P&L they are talking rubbish.
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