How does a CFD Broker really earn money?

CFD brokers can pursue very different business models, the details of which can have a direct impact on possible conflicts of interest and the effective conditions in trading.

The spectrum of possible sources of income for CFD brokers is large. Possible sources of income are spreads, commissions, financing costs, profits from positions on own account and profits in connection with corporate events or events in the underlying asset.

Among the most relevant costs in CFD trading are spreads, which are defined as the difference between the buy price and the sell price or bid/ask spread. Whether a broker earns money on spreads depends on his market model.

He can either pass on the actual spreads of the reference market 1:1 to the customer or he can determine the buying and selling price and thus the spread between them.

Find the right CFD broker

CFDs work with levers. Our comparison will show you which CFD brokers are particularly safe thanks to measures such as the exclusion of a margin call or guaranteed stop-loss orders:

The broker makes a clear distinction between spreads (with own margin) and market spreads (without own margin).
Basically, the type of fee charged does not have to change the total costs: a broker could widen the market spread by a fixed factor and thus offer the same transparency that brokers without their own margin can offer in the spread. In practice, however, this is rarely the case.

If a broker does not earn money on the spreads, he must necessarily charge commissions for trading. Fees customary in the market are in the range of 0.1 % of the leveraged transaction volume per transaction. Ideally, the broker sets a fee cap, because otherwise the absolute fees can be very high due to the large financial leverage.

Otherwise, a fee rate of 0.1% for a position size of 100,000 € when opening and closing the position together at fees of 200 €.

Profits through financing costs

It’s no secret that many CFD brokers put margins in the financing costs they charge their clients.

Basically, for long positions Financing costs debited, credit notes issued for short positions. In practice, brokers charge a significant premium on the market interest rate for long positions and deduct it for short positions.

CFDs that replicate futures are often charged at the full financing cost. This is not justified because the broker has a much lower capital outlay when mapping his own contracts through futures, and clients also have to bear the cost of rolling them.

What happens with dividend payments?

The holder of a CFD does not have the rights of a shareholder. He does not have the right to vote at the general meeting and does not receive a dividend.

Nevertheless, the dividend payment in a share is extremely relevant for CFD positions, as the price of the share changes on the day of the payment. As a rule of thumb, if a share quoted at €85 pays a dividend of €4, the share price will fall from €85 to €81 on that day.

There are basically two ways in which CFD brokers can handle dividend distributions. With a long position, either the amount distributed can be credited to the trading account and neutralize the loss in the CFD contract caused by the price loss.

Alternatively, the cost price can be reduced by the amount of the dividend.

Taxation of Dividends from CFDs

With a short position, on the other hand, the distribution amount is either debited from the account or the cost price is increased, so that the distribution of the dividend alone does not have any wealth effect either.

It should be noted that the distributed dividend is subject to final withholding tax, even if the dividend does not accrue directly to the holder of the CFD contact.

Some brokers behave less fairly and retain a part of the distributed dividend. Who trades more frequently with CFDs on shares should consider this and if necessary make a turn around such providers.

Conflict of interest when trading on own account

Brokers can earn money by trading for their own account and by assuming market risk. The boundaries between a broker in the strict sense and a speculator are often blurred.

For example, market brokers often hedge net positions on the financial market, but not always.

If a broker acts against his clients and he can make money if they lose, there is a fundamental conflict of interest. This is particularly relevant if the broker – as is regularly the case with market makers – is responsible for the quotation himself.

In the worst case, this can be exploited to take advantage of one’s own clients in favour of higher own profits.

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