Understanding costs

When you trade, there are several potential costs you need to be aware of. Because a demo account simulates a real trading environment, the costs are replicated, too, to help you understand exactly what fees and expenses you’d incur under real-world circumstances.

In this lesson, we look at the main types of trading fees, costs and other critical financial considerations, and how these might differ between various products.

What are trading fees?

Trading fees are the primary way in which brokers make money. They apply when you buy or sell an asset and are paid to the broker as a commission for helping to facilitate the trade through its platform. Trading fees change substantially from product to product, so they’ll be different if you’re trading forex, options, shares and so on. They also vary between brokers.

Fee models also differ. For example, some providers give a discount on charges for people trading particularly large volumes. Some charge a flat fee to initiate a trade, regardless of the size, while others charge a commission per unit traded. Some use a combination of a base fee, plus a fee per unit.

It’s important to understand trading fees because they affect the amount of money you end up with.

Types of trading fees and costs

Let’s take a look at some of the most common types of fees and costs you’re likely to encounter as you explore your demo trading account:

Spread: in trading, a spread is the difference between the buy (offer) and sell (bid) prices quoted for any given asset, and you’ll most often see this in spread betting and contracts for difference (CFD) trading (except when trading share CFDs, where we charge a commission instead). This is the way many brokers quote their prices. It simply means that what you’ll pay to buy an asset will always be slightly higher than that of the underlying market, while the price to sell will always be slightly below it.

You can calculate the spread by deducting the bid from the offer. When you’re trading, you’re hoping that the market value will move beyond the price of the spread so that your trade can be closed in profit. If the price doesn’t go further than the cost of the spread, you risk closing at a loss, even if the market moves in the direction you’d predicted.

You can work out your total spread cost by multiplying the monetary value of your position per point by the spread. It’s important to bear in mind that CFD position sizes are based on contracts, which means the calculation involves an extra step.

For example, say you purchase 1 contract on an index, where that 1 contract is valued at £10 per point, and the spread between the bid and ask price is 1 point, your total spread cost would be:

1 contract x £10 per point (the value of the contract) x 1 point spread; total cost = £10

Commissions: these are charged when trading shares using a CFD account and are calculated as a percentage of the transaction value for most markets, with minimum charges, or as cents per share. For example, say you want to trade shares on a company on the FTSE 350. The commission you’d pay on each side of the trade (in other words, to open and close) is 0.10% with a minimum charge of £10 online; if you traded over the phone, the minimum would increase to £15. Similarly, if you traded US shares, you’d pay a 2c/share commission each side of the trade, with the minimum value being $15 online, or $25 over the phone. You can learn more about our share CFD trading costs here.

Overnight funding: if you hold a short-term trade and you decide to keep it open overnight, you’ll be charged a daily interest fee. For example, this charge applies to daily funded bets (DFBs) and cash CFD positions. This is because these products are leveraged, which means you’re effectively being lent the money required to open a trade. To keep your position open after 10pm (UK time), it needs to be funded overnight, and this means an interest adjustment will be made to your account to reflect that cost.

It’s important to understand that overnight funding fees will be shown as separate charges on your account, and not reflected in your running profit/loss (usually delivered via an email statement). You need to take these charges into account when calculating your actual profit. It’s also critical to know that overnight funding is calculated differently for indices, shares, ETFs, forex, commodities and other markets.

Gross exposure

Something that many beginner traders struggle to understand is the potential impact of their gross exposure on their profit or loss.

Financial exposure is simply the amount of money you stand to lose when you trade or invest, also known as risk. When you invest in an asset, your exposure is limited to the amount you pay for it. For example, if you buy 100 shares in ACME Company at £1 per share, and they lose all of their value, the maximum amount you stand to lose is £100.

However, when you trade using leverage, you'll use margin (a deposit) to open your position. While this reduces the initial outlay, it amplifies your exposure and magnifies both profits and losses. For example, if your margin is 20% on ACME Company shares on a £1000 trade, then you’d only need to pay £200 to open the trade. Your exposure, however, is the full amount of the trade – £1000.

Your gross exposure is your total exposure to the market, including long and short positions and use of leverage.

In the next lesson, we’ll look at some of the important metrics to consider when evaluating your trading performance, as well as some different ways to use your demo account to experiment with different products.