If you trade with leverage, using products such as contracts for difference or spread bets, you may notice a small charge appearing on your account each night you hold a position. That is the overnight financing charge, sometimes called a swap or rollover fee. It is easy to ignore on a single day, but over weeks and months it can eat a surprising amount of your profit.
Why the charge exists
When you open a leveraged position, you only put down a fraction of its full value as margin. Our guide to leverage explains how that works. In effect, your broker is lending you the rest. Overnight financing is the interest on that loan. If you hold the position past the daily cut-off time, you pay, or sometimes receive, interest on the full value of the position.
How the charge is calculated
Most brokers base the charge on a benchmark interest rate for the currency involved, plus a markup. For UK positions the benchmark is often SONIA, the sterling overnight rate. For a long position you usually pay the benchmark plus the markup. For a short position on shares or indices you may receive the benchmark minus the markup, which can still be a cost when rates are low.
The charge is applied to the full size of the position, not just your margin. That is why it adds up. A position worth £10,000 held for a year at a total financing rate of 7 per cent would cost about £700, regardless of how much margin you put down.
How it works in forex
In currency trading, the charge reflects the difference between the interest rates of the two currencies in the pair. If you buy a currency with a higher interest rate against one with a lower rate, you may receive a small payment each night, before the broker’s markup. That is the basis of the carry trade. If you do the opposite, you pay.
Weekends and futures
Many brokers charge three nights of financing on one day of the week, usually Wednesday or Friday, to cover the weekend. Some products, such as futures-based CFDs or spread bets with a fixed expiry, build the financing cost into the price instead of charging it nightly. These can be cheaper for longer holds, though spreads are often wider.
Why it matters
For short-term traders who close positions the same day, financing barely matters. For anyone holding leveraged positions for weeks, it can turn a winning trade into a losing one. With interest rates higher than they were a few years ago, financing costs are noticeably bigger. Our guide to spread betting versus CFDs covers other costs to compare.
Rate decisions matter too. When central banks change rates, financing charges follow. This week brings the Federal Reserve on Wednesday 28 October and the European Central Bank on Thursday. Our Morning Market Brief has the full calendar.
How to manage it
Check your broker’s financing rates before you trade and include them in your plan. For longer-term ideas, compare the cost of holding a leveraged position with buying the asset outright or using a product with financing built in. Review your statements so you know what you are actually paying.
The bottom line
Overnight financing is the interest you pay for holding a leveraged position. It is small day to day but can be significant over time, so factor it into every trade you plan to hold for more than a few days.
If you want to find out how you handle decisions like this, and where your own trading could improve, the free Samuel & Co Trading Trader Assessment is a sensible next step.
