Leverage Trading Fees & Costs: All You Need to Know
We all know that leverage affects your trading results when it comes to profits and losses, but how does leverage trading affect your fees?
What is the difference between opening a blank position of $200 and a leveraged position of $12,000?
Are there any other special fees that you should be aware of when investing in the stock market or crypto market with added buying power?
In this guide, we are going to debunk all the myths and questions regarding fees while trading with leverage.
I hope after reading this article that you will have a full understanding of all the fees and commissions associated with brokers that offer leverage.
There might be some fees that you are not aware of and since I have experience working at international brokers I am going to share the ins and outs of how these brokers charge commissions. I will also give you some tips on how to move around these fees in a smart way and get away with a lower cost while you trade.
In this guide:
- All the fees in leverage trading
- How leverage affects your fees
- Leverage trading fee comparison
- Leverage stock fees
- Leverage forex fees
- Leverage crypto fees
- Different leverage trading product fees
- Questions asked by other traders
What are all the fees in leverage trading?
There are more fees than most traders expect the first time they create an account with a forex broker or stockbroker that offers leverage. First of all, leverage means that you are borrowing funds (money), and every time you borrow the money you have to pay it back with an added interest payment.
It looks very similar to when you borrow money for buying a car och a house, you are going to pay back the loan plus interest. The same thing goes for borrowing funds on a trading platform. Below is a list of the most common fees that leverage brokers impose:
- Management fee
- Trading fee
- Funding rate
When you add leverage to your position you are essentially taking a loan from your broker for the duration of your trade. When you close out the position you get to keep the profit or you have to pay the losses. A common question I often hear is “How much can you lose more with leverage? or Can you lose more than you invest with leverage?“. The answer can be both yes and no, it’s all about how much size you decide to trade with. A large position could potentially lose more.
There are however more costs to this transaction than just the potential losses. There is a fee for opening a leveraged position, a fee to close to the position, and then there is a fee to maintain the position open which is called a management fee or sometimes rollover fee or overnight fee. This fee is essentially an interest payment for borrowing capital for more than 24 hours.
Another cost of doing business with a broker that offers leverage is the funding rate fee which is a commission paid between traders that hold open positions to maintain a stable price. Since all leveraged trading products are mirrored contracts of an underlying asset there has to be a way to maintain the price stability and follow the price of the underlying asset.
Management fee, Rollover fee, or Overnight fee
What is a management fee? It is an interest payment that brokers charge their users for accessing leverage on the platform. It is also called a rollover fee or overnight fee and is paid once per day, usually at 12 o’clock at night when the contracts roll over to the next day. The reason why brokers add this cost to their activities is pretty simple, they are charged the same fee from the financial institutions that lend them their money.
Most brokers don’t have deep pockets enough to lend out leveraged funds to their traders and the way they get this money is through third-party institutions such as banks. The banks lend them money and the broker lends this money to the users of the platform and therefore they add this commission.
The management fee is only paid when holding a position overnight. Day traders that close all their positions before the end of the day don’t have to pay this commission to their broker. Only swing traders and investors who hold leveraged positions overnight are charged. The overnight fee is usually pretty low and sits around 0.03% of the total position size. Since many leveraged ETFs are carried over to the next day and in most cases several weeks or months it is worth spending some time looking for a broker that charges a minimum overnight fee.
This is the most common fee that trading platforms charge their traders and it is also how brokers make money on leverage. Every time you open or close a position a small commission is taken from your total account balance as a direct payment to the broker.
There are two types of trading fees, the maker fee, and the taker fee. They have two different functionalities and are usually priced a little differently with the maker fee being cheaper than the taker fee.
The taker fee is charged every time you open or close a position with a market order. The market order instantly buys or sells the first order in the order book and is the fastest way to enter the market. It is called “taker” because you are taking away liquidity from the order book. Since you are removing liquidity from the order book you are charged a slightly higher commission.
The maker fee is charged when you open or close a position with a limit order. As a market maker, you add liquidity to the order book and are therefore rewarded by a lower commission. In some cases, you can even get paid for adding liquidity to the order book and then the maker fee would be negative, for example, -0.0025%.
Funding rate fee
The funding rate commission is a way for brokers to incentivize traders and investors who trade on the platform to follow the price of the underlying asset. Since most leveraged brokers use contracts that mirror the price of an underlying asset, for example, a stock, there has to be a way for traders to keep the price the same as the underlying asset.
The funding rate is based on all long and short positions and depends on how the leveraged contract is priced in relation to the original stock price longs will pay shorts or vice versa shorts will pay longs. After each funding period, the rate is calculated again depending on the price difference between the leveraged contract and the original price of the underlying asset it follows.
When the funding rate is positive, longs will pay shorts. This means that all traders who hold a short position during the next funding period will receive a bonus payment. The reason why the rate is positive is that the price of the contract is currently being priced too high in comparison to the underlying asset. This gives an incentive to all traders to add short positions to stabilize the price. This commission goes straight into your account balance and is yours to trade with.
When the funding rate is negative, shorts will pay longs. This happens when the price of the leveraged contract is priced too low. To keep the price stable and pegged at the price of the underlying asset, brokers incentivize traders to open long positions to receive an extra bonus payment and therefore keep the price stable and pegged to the underlying asset. The same goes for this payment, it is readily available in your account balance immediately after you receive it.
How does leverage affect your fees?
Leverage increases the fees you pay because it increases the size of each position you open. The more leverage you use the bigger positions you are capable of opening which in turn increases the overall fee you pay.
Let’s take a look at exactly how leverage affects your transaction costs and the easiest way to show this to you is to include a table with increasing leverage on the same account size. We are going to use a transaction fee of 0.20% that we will apply to all positions at different ratios of leverage and you will see how it affects the cost. Below is an example of an account of $500 and we are going to use the 0.20% commission to open positions at 1:2, 1:5, 1:10, 1:25, 1:50, and 1:100 leverage. Take note of how the fee is increased for each position where the first ratio of 1:1 is an example of no leverage.
|Total fee of $500||-$1||-$2||-$5||-$10||-$25||-$50||-$100|
As you can see, using a leverage ratio of 1:2 doesn’t increase the transaction fee that much but with a ratio of 1:100 you are using paying a fee of $100 for each trade. That is 20% of your total account size every time you enter and exit the market.
Use this formula to calculate your trading fees when using leverage:
Account Size x Leverage = Position size
Position Size x Transaction Fee = Total fee
Below follows the calculation for each leverage ratio:
$500 x 1:1 = $500
$500 x 0.0020% = $1
$500 x 1:2 = $1000
$1000 x 0.0020% = $2
$500 x 1:5 = $2500
$2500 x 0.0020% = $5
$500 x 1:10 = $5000
$5000 x 0.0020% = $10
To learn more on this topic, read our guide on the best leverage for a small account.
$500 x 1:25 = $12,500
$12,500 x 0.0020% = $25
$500 x 1:50 = $25,000
$25,000 x 0.0020% = $50
$500 x 1:100 = $50,000
$50,000 x 0.0020% = $100
Leverage trading fee comparison
To see the difference between how a leveraged position affects your fees we are going to make a comparison between the spot market and the leveraged market. In our spot market, we are going to pay a transaction fee based on the position size without increased buying power and in the leveraged market, we are going to add a ratio of 1:25 leverage and see how they compare.
In these examples, we are using a 0.10% commission and we are going to use the full account size for each position.
|Account size||Spot market fee (1:1)||Leveraged market fee (1:25)|
Here it’s obvious how a bigger position size increases the transaction cost of the same account size. For example, if you have an account size of $7500, a transaction fee of 0.10%, and you open a position with all your capital, you are only going to pay a fee of $7,50. However, if you take the same account size, the same fee, but add 25x leverage to the mix you are suddenly paying $187,50 for opening the position.
This is how fees compare when used in a leveraged market and in the spot market. It doesn’t matter if the fee stays the same, the increase in position size is what causes the increased commission.
Leverage Stock Fees
Today, stock exchanges charge very low transaction fees and most of the bigger names have a $0 fee for opening and closing trades. There are however some fees that you will expect to pay when using borrowing funds for investing in the stock market and that is the management fee. This commission is charged daily at midnight and is the interest payment for using borrowed funds. For example, if your account size is $1000 and you borrow capital with a ratio of 1:5 you will only pay the management fee on the borrowed funds.
This makes stock trading with leverage pretty cheap compared to other tradable assets such as forex and cryptocurrency. The reason why stock investing is cheaper is due to the competition among brokers. In order to attract more users, they have to push the commissions lower and lower and find other sources of revenue.
Many CFD leverage trading platforms that offer stock trading that offer $0 commissions make a profit on the total amount of capital that the users deposit in their accounts. This capital is combined in the brokerage main account and earns an interest payment daily. Leverage stock trading has one of the lowest fees on the market due to high competition among CFD brokers. You can often find 0% commissions on both maker and taker trades.
Leverage Forex Fees
Forex brokers are known for charging a spread commission for opening and closing trades. Since many forex brokers have the leverage built in the platform and the only way to control your risk is through the position size you are always charged the same amount of spread. The difference in commission depends on how big your position is.
Many forex brokers use a ladder system where more active traders pay a smaller fee to incentivize active day traders or large investors to use the platform. This is very beneficial if you are active in currency trading since your spread will shrink drastically when you reach a higher level inside your broker. Since many forex brokers are CFD platforms they are forced to charge a very low spread due to the high competition among brokers.
Except for the spread, forex brokers also charge an overnight rollover fee. This fee is the same interest payment that is added only to the borrowed funds. The more money you borrow the more you pay each time the management fee kicks in. Before opening an account with a forex broker remember to check how much the overnight fee is. On some occasions, you are able to lower this fee by being an active trader.
In our complete guide to how forex leverage trading works we explain in more detail how forex spreads work and what it would cost to open different position sizes.
Leverage Crypto Fees
Cryptocurrency exchanges that offer leverage have three sets of fees, the trading fee, funding rate, and management fee. Most leveraged products are hosted by derivatives exchanges that will lend you money in order to open larger positions. These borrowed funds have an added interest payment where traders are charged daily for accessing more purchasing power.
Crypto derivatives are contracts that mirror the price of another underlying asset. To keep the price stable and accurate, some exchanges impose a funding rate to incentivize traders. When the rate is positive longs will pay shorts and vice versa. This fee does not go to the broker, instead, it is paid among the traders using the platform.
Lastly, the trading fee is added and this is what causes the most damage to active traders. Right now, crypto exchanges are pretty expensive so it’s important to choose a platform with fees that are lower than industry standards.
Leverage Trading Product Fees
There are plenty of investment products that offer borrowed funds for traders and investors and I want to shine some light on the fees that you should expect when trading these different products. There are some distinct differences in how brokers charge their traders and depending on your style of investing you can choose a type of product that will be more economic and cause less damage to your account.
- Futures – Futures products are a type of derivatives that charge a commission for opening and closing positions. This is usually a fixed fee that varies from asset class to asset class. There is no overnight fee for carrying futures positions over to the next day and there is also no funding rate.
- Options – Options leverage increases the fee you pay which is the premium for buying the options contracts. This fee varies depending on the strike price and other factors. There is no other commission.
- CFD – When trading contracts for difference there is always a transaction fee and a management fee. The management fee is charged every day at midnight and is only applied to contracts that are carried over to the next day. The commission for opening and closing position depends on the asset class you are trading.
- ETF – Leveraged ETFs usually have a transaction fee for opening and closing the position followed by a management fee that is charged for carrying the position over to the next day.
- Derivatives – Derivatives are a name for many other products such as swaps, perpetual, and inverse perpetual swaps. Depending on which broker or exchange you choose they have different commissions. There is a chance that you will pay all three fees depending on the asset class. For example, if you trade cryptocurrency derivatives you will sometimes be charged all three.
Now you should be more familiar with the commissions for each product. Keep in mind that different brokers apply different fees and they change from asset class to asset class. For example, if you want to trade stock futures, your only fee will be the transaction fee and if you want to trade cryptocurrency CFDs you will pay both the commission for opening the contract and a rollover fee for each day the position is kept open. Always make your own research before selecting a new broker.
Questions asked by other traders
Yes, it does. When you use leverage you pay a commission called the “management fee” which is a type of interest payment for using borrowed capital.
This depends on the broker you choose. Some trading platforms only charge a commission for opening positions while others charge for keeping positions open overnight.
Yes, the extra fee for using leverage is called the management fee and is paid every day around midnight. This commission is not charged by all brokers so make sure you read up before you create your account.
Yes, trading with leverage increases commissions depending on the ratio you use for opening positions. In addition, leveraged brokers charge a rollover fee for traders who keep their positions open overnight.
The funding rate is used to incentivize traders and investors to keep the price of a derivatives contract the same as the price of the underlying asset. When the rate is positive, longs pay shorts, and vice versa when it is negative. The funding rate is paid among trader and the broker does not earn a profit from it.