Spreads and commissions are essential service fees charged by brokers for facilitating trades. While some traders may feel wary of these costs, understanding how these fees work can help traders better assess trading costs and build a clearer picture of overall transaction expenses.
Let’s explore everything about CFD trading spreads and commissions.
What are spreads in CFD trading?
Spreads in CFD trading refer to the difference between the buy (ask) price and the sell (bid) price of a contract. It’s essentially the cost traders pay to open a position. There are two types of spreads in CFD trading:
- Fixed spreads: These remain constant regardless of market conditions. Traders know the exact cost upfront, which can be helpful in volatile markets, but fixed spreads may be wider than variable ones
- Variable spreads: These fluctuate based on market liquidity and volatility. During calm market conditions, spreads tend to be tighter (smaller), but they can widen significantly during news events or high-volatility periods
How spreads affect trading costs
Initial cost on trade entry
Traders start with a loss equal to the spread because they enter at the higher ask price and exit at the lower bid price.
Break-even price movement
A wider spread means the market price must move further in the trader’s favor to cover the spread and reach the break-even point.
Effect on frequent trading
Traders who open and close positions often (such as day traders and scalpers) face higher cumulative costs due to repeated spread payments.
Typical spread ranges for popular CFDs in Australia
ASX 200 index CFDs spread ranges
The ASX 200 index is a CFD trading option in Australia. Spreads fall between 1.0 and 3.0 points, representing the difference between the entry and exit prices set by brokers. Tighter spreads mean lower trading costs for investors. Some brokers offer fixed spreads as low as 0.9 points during less volatile market conditions, while variable spreads may widen when markets become volatile or liquidity dries up, increasing trading expenses.
Forex CFD typical spreads
Forex CFDs, especially those involving major currency pairs like AUD/USD or EUR/USD, usually have very tight spreads due to their high market liquidity. The minimum spreads often start at 0.6 to 0.8 pips, with averages near 0.8 to 1.0 pips.
However, minor or exotic currency pairs have wider spreads because they experience less trading activity. Their minimum spreads range from 1.5 to 3.0 pips, and their averages are closer to 2.0 to 4.0 pips. Narrow spreads are crucial for frequent forex traders since they reduce overall trading costs.
Commodity CFD spread ranges
Spreads for commodity CFDs, like crude oil or precious metals, generally reflect the volatility and liquidity of the underlying markets. For instance, crude oil CFDs often have minimum spreads around 0.03 to 0.05 USD and averages near 0.05 to 0.06 USD.
Gold and silver CFDs tend to carry wider spreads, with minimums usually between 0.20 and 0.50 USD. Average spreads can range up to 1.00 USD. During periods of market unrest or geopolitical tension, these spreads can widen, increasing the cost of trading.
Share CFD typical spreads
Share CFDs, particularly those on Australian stocks, usually have minimum spreads close to 0.08% of the share price. For international shares, spreads tend to be slightly higher, often falling between 0.10% and 0.15%.
Since the spread is proportional to the stock price, it’s an important factor for traders, especially those who trade in smaller volumes or frequently, as it directly impacts profitability.
Cryptocurrency CFD spread ranges
Cryptocurrency CFDs, including assets like Bitcoin and Ethereum, generally feature much wider spreads compared to traditional CFDs. Typical spreads can be around 8 to 9 USD or higher due to the market’s inherent volatility and lower liquidity.
These broader spreads raise trading costs, which is a key consideration for crypto traders, particularly those employing short-term or high-frequency trading strategies. Spreads can become even wider during times of extreme price swings or limited market activity.
Sources:
- Australian Securities and Investment Commission
- Australian Securities Exchange
- Bank for International Settlements
- U.S. Energy Information Administration
- World Gold Council
- CoinMarketCap
- International Monetary Fund
Understanding commissions on CFDs
In Australia, commissions on share CFDs are typically calculated as a percentage of the total trade value or as a fixed fee per trade. These commissions apply when opening and closing positions, and rates vary depending on the broker and the trade size. Usually, there is a minimum commission amount to ensure smaller trades cover operational costs.
This commission structure ensures that traders pay proportional fees based on the size of their investment in shares, making it essential to consider these costs when planning frequent or large-volume trades.
Commission structures used by Australian brokers
Flat commission per trade
Brokers charge a fixed fee per trade, regardless of size. This model offers predictable costs but may be expensive for small trades since the fee doesn’t scale with trade value.
Percentage-based commission
The commission is a set percentage of the trade value. Larger trades incur higher fees, making costs proportional to trade size. This arrangement is fairer for varying trade volumes but can add up for high-value trades.
Tiered commission structure
Commissions decrease as trading volume rises. High-volume traders pay lower rates, incentivizing frequent or large trading. This rewards active traders with reduced costs, benefiting those who trade regularly.
No-commission or zero-commission models
Brokers offer commission-free trades but earn via wider spreads or other fees. While attractive, traders should watch for hidden costs, as spreads may be less favorable, offsetting the lack of direct commissions.
Commission plus spread models
This hybrid charges both a commission and a spread. It usually features tighter spreads than zero-commission accounts, providing transparent, itemized costs for better clarity on total trading expenses.
How to compare brokers based on spreads and commissions
- Assess average spread costs: Review typical spreads to understand the basic cost of opening and closing trades.
- Evaluate commission fees: Check fixed or percentage-based commissions applied per trade or lot.
- Consider hidden charges and fees: Look for additional costs like overnight fees, currency conversion, or account maintenance.
- Compare trading platform fees: Factor in any charges related to using the broker’s trading software or tools.
- Review execution speed and slippage impact: Analyze how fast orders are executed and potential costs from price slippage.
- Check for volume-based discounts or rebates: Identify if brokers offer reduced fees or rebates for higher trading volumes.
- Analyze overall cost efficiency: Combine all costs to see which broker suits the trade size and frequency the most.
Recognize trading costs before entering a trade
Understanding spreads and commissions before entering a trade helps provide a clearer view of trading costs in CFD trading. Awareness of these fees can support more informed comparisons between brokers and a better understanding of overall transaction expenses.
Disclaimer: All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. As margin FX/CFDs are highly leveraged products, your gains and losses are magnified, and you could lose substantially more than your initial deposit. Investing in margin FX/CFDs does not give you any entitlements or rights to the underlying assets (e.g. the right to receive dividend payments). CFDs carry a high risk of investment loss.