Financing and Overnight Costs

Financing costs are what you pay, or occasionally earn, for holding a leveraged position over time. If you borrow money to buy shares, hold a forex position past the daily rollover or keep a CFD open overnight, interest is charged on the position. These costs are small for a day but compound over weeks and months, and they are one of the main reasons leveraged products are poor long term holdings.

Where financing costs appear#

CFD financing in detail#

Short CFD positions may receive a small credit or pay a smaller charge, depending on the benchmark rate and markup.

Forex swaps#

In forex, each currency carries an interest rate. Holding a position past the daily cut off means you earn interest on the currency you bought and pay interest on the one you sold, adjusted by your broker. If the currency you hold has the higher rate, the swap may be positive; if not, it is a cost. Positions held over the Wednesday rollover are typically charged three days to cover the weekend. See Rollover and Swap in Forex.

Margin interest on stocks#

Brokers charge interest on margin loans at rates that usually depend on the loan size, often well above central bank rates for smaller balances. On a $20,000 loan at 10% a year, the cost is about $5.50 a day or $2,000 a year. See Margin.

Crypto funding rates#

Perpetual futures have no expiry, so exchanges use funding payments to keep their price near spot. When funding is positive, longs pay shorts; when negative, shorts pay longs. During strong rallies, positive funding can reach annualised levels of tens of percent, a heavy cost for leveraged longs held for days. See Funding Rates.

Carry: when financing works in your favour#

Financing is not always a cost. In a carry trade, a trader deliberately holds a higher yielding asset funded by a lower yielding one, earning the difference over time, for example long a high interest rate currency against a low rate one. Carry can be a steady source of return until a sharp reversal wipes out months of gains. See Carry Trading.

Including financing in your plan#

1. Estimate the daily cost before entering any leveraged position you may hold overnight.
2. Compare it with your expected profit and holding time. A trade expected to make 3% over two months may lose most of that to financing.
3. Prefer unleveraged or futures based exposure for longer holds, where costs are lower or built in.
4. Track financing in your journal as a separate cost.

Frequently asked questions#

Why was I charged overnight on my CFD?#

Because CFDs are leveraged, and brokers charge daily interest on the full position value for positions held past the daily cut off.

Can financing ever be positive?#

Yes. Forex swaps and crypto funding can pay you if you hold the side that receives interest, and short CFD positions sometimes receive a credit.

Are futures cheaper to hold than CFDs?#

Usually, for longer holds, because futures have no separate daily financing charge; the cost of carry is priced into the contract.

Sources#

• Wikipedia, Cost of carry