When trading CFDs (Contracts for Difference), many beginners focus solely on market direction whether to buy or sell but overlook two critical costs: spreads and commissions.
These costs may seem small, but they directly impact your net profit (or loss) on every single trade.
Understanding how spreads and commissions work is essential if you want to trade CFDs profitably and avoid surprises when you close a position.
What Is a Spread?
The spread is the difference between the bid (sell) price and the ask (buy) price of a CFD instrument.
- When you buy, you enter at the ask price.
- When you sell, you exit at the bid price.
The spread is effectively the broker’s markup and represents an immediate cost when you open a trade.
Example:
If the EUR/USD quote is:
- Bid: 1.1000
- Ask: 1.1003
The spread is 3 pips.
As soon as you open a buy position, you are down by 3 pips — and need the price to move in your favor by at least 3 pips just to break even.
What Are Commissions?
A commission is a fixed fee charged by the broker for executing your trade. Not all brokers charge commissions — many include their costs in the spread (this is known as a spread-only model).
Commission-based accounts usually offer:
- Tighter spreads, but
- Per-trade commission fees, often charged per lot traded
Example:
If your broker charges $7 per round trip (entry + exit) per standard lot (100,000 units), you’ll pay that amount regardless of profit or loss.
How These Costs Affect Your CFD Profit
1. Reduces Your Net Gain
Every trade starts at a loss because of the spread and/or commission. You must overcome these costs before your trade becomes profitable.
- Small profits can easily be wiped out by high spreads.
- Frequent traders (scalpers or day traders) are more affected, since they open many trades.
2. Erodes Returns Over Time
Over hundreds of trades, spreads and commissions add up.
Even a small spread can significantly reduce your annual trading returns if not factored into your strategy.
3. Impacts Trade Timing
Wide spreads during volatile or low-liquidity times (like after hours or during news events) can make it difficult to enter or exit trades at desirable prices.
How to Minimize the Impact of Spreads and Commissions
1. Choose the Right Broker
Look for brokers that offer competitive spreads and clear commission structures. For South African traders, ensure the broker is FSCA-regulated and transparent.
2. Trade Major Instruments
CFDs on major forex pairs, indices, and popular stocks usually have lower spreads compared to exotic pairs or illiquid assets.
3. Avoid Trading During High-Spread Periods
Stay out of the market during news releases or market opens, where spreads often widen.
4. Use Limit Orders Instead of Market Orders
Limit orders give you more control over entry and exit points, helping avoid unnecessary spread slippage.
5. Factor Costs Into Your Strategy
When calculating your risk-reward ratio, always include both spread and commission. A trade with a reward of 10 pips and a spread of 3 pips has a much lower effective payoff than it appears.
Final Thoughts
Spreads and commissions are unavoidable costs of CFD trading — but they can be managed.
By understanding how they work, choosing the right instruments and brokers, and adjusting your strategy accordingly, you can reduce their impact and keep more of your profit.
Always treat trading like a business — and in business, costs matter.
