CFD Trading in the UK 2021
Online CFD trading can be a way for UK traders to diversify trading portfolios and strategies. If you’re unfamiliar with how to trade CFDs online, we provide a detailed explanation of how it all works, plus some useful tips and tricks to help you get started.
This article also covers the pros and cons of CFD trading, including how to set up an online account and make money. We’ll also look at other features, including trading platforms, UK tax rules, CFD margin and rollover, plus an introduction to the best brokers with full reviews.
Top 3 CFD Brokers
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
What Is CFD Trading?
CFD stands for ‘contract for difference’ and is a contract between two parties, whereby the difference between the opening and closing price of a financial instrument is exchanged. CFDs are a derivative product, meaning traders do not own the underlying asset. This differs from traditional trading, if you compare CFD trading vs investing in forex or stocks, for example, where you’d own the stock traded.
How Do CFDs Work?
You can define the extent of the profit or loss by speculating on the price direction, therefore going long or short on the position. This means you predict whether the price will rise or fall. CFD contracts are also determined by margin and leverage, which will also be explained later.
You can trade CFDs on a number of markets, including forex pairs, UK, US and other global stocks, options, plus commodities like gold and oil. In the UK, the FTSE 100 index is a particularly popular CFD.
CFD Video Tutorial
An Example Of A CFD Trade
Here is a walk through of a contract for difference trade:
In our example, we are going to open a trade on Vodafone. The specific screens and layout will differ between brokers, but the fundamental elements will remain:
- Notice the ‘Sell’ and ‘Buy’ values differ. The gap between values is known as the “spread”. This small percentage is how the broker will derive a profit.
- In the example we have selected ‘Buy’, and set the trade size to £1. This means for each whole unit the asset price moves, our position will go up by £1 or down by £1.
- We have also entered a figure in the ‘Stop loss’ box. This is a risk management tool. In the example, our stop loss is set 5 points away from the opening price. This should limit our potential loss to just £5. Stop losses however, are not always guaranteed.
- The ‘margin required’ (highlighted in red) is the amount of funds needed in the account in order to open the position.
- Lastly, click the ‘Place Deal’ button to confirm the trade. We now have an ‘open position’ on Vodafone, for £1 per point.
In a similar way to the trading screens, brokers will display open positions in a variety of styles – but always show the same details:
The opening price shows our ‘strike’ price, and the latest price is just that – the current market value. Our stop loss value is shown – as is the current profit/loss. As our trade has only just been opened, we have to ‘make up the spread’. So the position is currently 50p down.
As the spread needs to be covered, almost every trade will open at a small loss – just as it has above. Any fees or trading costs are built into this spread. Where a trade is held open overnight, a very small charge will be applied. Even with a trade held open for months, this fee remains tiny, relative to the investment itself.
When we decide to end the trade, we simply click the ‘Close’ button. Alternatively, we can open a new trade, and ‘Sell’ Vodafone for £1 per point. But using the ‘Close’ button is far easier.
There is no time limit or expiry on a CFD.
Our £1 CFD effectively exposed us to £200.85 worth of investment. This is important to remember. While the broker only requires you have £7.55 in the trading account, you are still exposed to risk beyond that. If the Vodafone share price collapsed for any reason, the trade could lose way more than £7 or £8. Losses can exceed deposits. For this reason the stop loss is a vital tool in risk management.
Trading Example – Result
After opening the trade above, we now have an open position – What happens now?
Our trade will now mirror the fortunes of the Vodafone share price. For each penny the stock price rises or falls, our positions will gain, or lose, one pound respectively. So here are some scenarios:
The Share Price Rises
Assume the spread on Vodafone shares reaches 205.85-206.35. In order to close our ‘Buy’ position opened above, we need to ‘Sell’ the same value of assets. So we will be taking the lower side of the spread – in this case 205.85.
Our original ‘strike’ price was 200.85. If we close the trade at 205.85, the CFD has closed 5 points higher. This means we are due 5 times our trade size – in our example £1 – so:
5 x £1 = £5.
In our example above, we opened at 200.85. Below, you can see the value rose to 203.4 – our profit or loss shows £2.55 profit on this trade as we close it:
The Share Price Falls
Assume the spread has dropped to 195.85-196.35. We still need to ‘Sell’ (and take the lower side of the spread). So the trade now settles at 195.85. The value has dropped 5 points, meaning we lose 5 times our trade size:
5 x -£1 = -£5.
Notice our stop loss was set at 195.85 above. This means our position would automatically close if the spread reaches that point. This is why the stop loss setting shows -£5 in red. That is the amount the trade will lose if the stop loss is triggered. If the price continues to go down, your trade will not lose any further funds. The caveat to this is that in extreme market conditions, stop losses may not be guaranteed, and may slip.
Remember, the point at which you close the deal is down to you.
In our example above, we opened a trade which gave us access to a trade value of £200.85 – equivalent to buying 100 Vodafone shares. The same process can be used to trade Gold, the price of oil or foreign currency.
Our example used a very small trade size, but factoring it up is a simple process. You can see then, how leverage can give CFD traders a large portfolio of investments, for a fraction of the outlay of traditional methods. With leverage comes risk however. Traders should note how much leverage and risk they are exposed to, and manage it correctly. Money management is a key element of CFD trading for a living.
Key Features Of CFD Trading
Spreads & Commission
CFDs are quoted in buy and sell prices, also known as the offer and bid prices, respectively. The difference between the two is known as the spread.
Usually, the cost to open a CFD trade is included in the spread price with no commission, however some brokers might charge the commission separately.
Trading on the lowest spread will mean you need less price movement in your favour to make a profit. You can of course make a loss too, if the price moves against you.
There may be some other charges, including overnight holding costs if you hold a position overnight, or market data fees. In some cases there may also be dividends on equities.
A CFD asset is usually traded in lots, which is the standardised contract volume. A contract can vary depending on the underlying asset traded. Gold, for example, has a contract for difference value of 100 troy ounces, which is 1 lot. One share CFD contract size usually has the same value as buying one share. For example, buying 100 Tesla CFD contracts will mimic buying 100 shares of Tesla.
Generally, CFDs do not have a fixed expiry because you are paying an interest charge (overnight rollover) which can allow you to keep positions open for as long as you want. Most traders, however, will not use CFDs as a long-term trading strategy.
Note that futures CFD contracts do expire, usually on a monthly basis, though this can vary. This means that unless closed by the trader, the futures contract will be rolled over into the next month.
Leverage & Margin
Leverage lets you deposit a small percentage of the full position value to gain more market exposure. This can be both good or bad – whilst leveraged trading can be profitable, it can also increase your losses.
The margin level is the amount needed to open and maintain the leveraged position. Deposit margin is the initial opening requirement, whilst a maintenance margin is what is required to keep the position open before it begins incurring losses. Most brokers will offer a margin calculator which can help you manage your margin levels efficiently.
It is possible to trade CFDs with high leverage up to 1:500 and to trade CFDs without leverage at all, however, regulations in the UK and some other jurisdictions have limited retail leverage ratios to 1:30. Professional clients can leverage more if they meet certain requirements.
How To Start CFD Trading
1. Choose A Broker
Before you start, it’s important to find the best CFD broker for you, who can offer a competitive trading account and facilitate your specific investment requirements. The quality of the trading platforms or apps you use will also have a huge impact on your CFD trading experience.
Most companies offer the MetaTrader suite, which offers excellent fundamental and technical analysis features, automated trading and risk management tools. Some brokers also offer CFD trading on impressive proprietary platforms, including eToro, Trading 212, IG, Plus500 and Oanda.
Traders should also consider what options are available to them if urgent support is needed with funds, fees or in the trading platform. Good brokers offer 24/7 customer support via either a live chat service or a telephone hotline. You can take a look at some of our 2020 UK broker reviews for guidance, or check out some customer feedback online. All of our brokers below offer straightforward online account registration and 24/5 trading hours.
2. Take A Position
When deciding whether to take a long (buy) position or a short (sell) position, you will need to employ effective strategies, indicators, charts and signals to help you determine which way the price will move.
The trading platform you use will have a significant impact on how you do this, so make sure you become familiar with the platform tools in a demo account.
3. Trade Size
Determining your position size should also take into consideration the amount of risk you are willing to take. CFDs are leveraged products, which means what you put down as an initial deposit may only be a small fraction of the total position size. Thus, it is possible to lose more than you initially commit.
4. Risk Management
Managing your risk is a key element to ensuring safe CFD trading. These usually include guaranteed stop loss and take profit limits, which are instructions to your broker to close your trade when it hits less than favourable levels. These can help prevent your account triggering a margin call and incurring losses.
5. Monitor Positions
It’s always important to get into the habit of monitoring your positions regularly, even if you have risk management tools in place. This allows you to stay on top of any opportunities or problems. Most good brokers also offer a mobile app, where you can login and monitor your positions from anywhere.
Brokers & Platforms
Trading CFDs also involves using a trading platform, such as the award-winning MetaTrader 4 (MT4) or cTrader. These include advanced features to assist traders with their price analysis and predictions, including robot algorithm technology, indicators and signals.
It’s important for traders to find a good broker who can offer good quality trading tools, but the best broker for you will depend on your investing preferences and experience. We recommend carrying out a thorough platform comparison, as well as checking out our list of CFD Brokers in the UK.
CFD Trading Strategies
Whether you’re day trading, swing trading or scalping, it’s important to understand the different investing styles and strategies used for CFD trading. Traders should also be aware of if or when a strategy works, and how you can mitigate risk if it’s not working. Back-testing is a great way to do this, which is why a good trading platform that can facilitate this is important. Some platforms also offer trading bot technology and analysis tools to assist your strategies.
Practice & Educate
When developing your knowledge of CFDs, make sure to take into account how CFDs work in the UK and look for education and news that can guide your research.
Well-established and reliable brokers can often act as a trading mentor by offering a range of training resources for beginners. These might include perhaps a starter guide in PDF format, online courses and e-books, YouTube video lessons, trading tips, or advice on a forum or community page.
For example, the XTB UK site offers a comprehensive trading academy catering to all trader levels, whilst Trading 212 offers a good selection of 101 tutorial videos. For those who prefer non-online learning, there are also plenty of useful and digestible books available, including the forex and CFD ‘Trading for Dummies’ collection.
Most brokers also provide access to a free demo account or tutorial, where you can test out trading strategies without risking real capital. Demos can provide the basics of CFDs for beginners, as well as a training ground for those who have been in the trading game for a while.
In the UK, CFD trading comes with some tax benefits, namely the exemption from stamp duty. This is because traders do not own the underlying asset.
However, traders do still need to pay capital gains tax in the UK, which should also be included, along with any losses, in a tax return to HMRC. There is an annual exemption, after which it’s useful to keep a journal on an Excel spreadsheet of your taxable earnings.
Note that tax treatment may vary in a jurisdiction other than the UK. For example, in Australia, CFDs are taxed by the Australian Taxation Office (ATO) on the basis of revenue account, not capital.
Find out more about UK trading and investing taxes.
Advantages Of CFD Trading
- Leverage – CFDs are leveraged instruments, so you only need to deposit a fraction of the full value of the trade to gain exposure to the market. Trader protections in the form of restricted leverage limits (capped at 1:30) were also introduced by the EU and UK. Firms are also required to include a CFD risk disclaimer on their website.
- Tax efficiency – In the UK, CFD trading is exempt from stamp duty tax, as you don’t own the underlying asset. This means that overall transaction costs when trading CFDs is generally lower than traditional shares trading, for example.
- Trade long or short – CFD trading can present excellent trading opportunities which allows you to take advantage of price declines. Also, as you don’t take any ownership, this form of trading is generally more flexible if you compare CFD trading vs stock or share trading. You can therefore buy and sell as easily as each other.
- Out of hours trading – Some brokers allow you to trade for extended times or out of hours at weekends. Be aware though, that prices can significantly fluctuate outside of typical trading hours, which can lead to losses if you don’t know what you’re doing. Make sure to check the market opening hours before trading.
Disadvantages Of CFD Trading
- Leverage – Although it does come with its obvious benefits, leverage can be a significant disadvantage. Having a large exposure can increase your losses as much as it can increase your profits. Make sure to put stops and limits in place to mitigate your risk.
- Trading scams – As with all online trading, scammers can operate within unregulated or unregistered brokerages, where traders will be promised big returns after a hefty initial minimum deposit. Some will also tempt new clients with attractive trading promotions, such as a no deposit bonus or ‘free gift’. Note that these are strictly prohibited by the UK’s FCA and other top regulators.
- Overnight financing fees – Traders have to pay interest fees on leveraged positions held overnight, which can increase significantly, the longer you hold that position open.
- Crypto-derivatives ban – As of 6th January 2021, the FCA has imposed a ban in the UK on the sale of crypto-derivative products for retail investors. This includes contracts for difference on popular instruments such as Bitcoin and Ethereum.
Final Word On CFD Trading
It is possible to make money with CFDs, however, leveraged trading can also lead to significant losses. Traders need to practice their trading skills, be disciplined and patient in order to be successful at CFD trading. This guide should act as a starting point and provides useful tips when it comes to choosing a CFD trading broker, account and investing platforms.
What's CFD Trading?
A CFD is a contract between two parties, whereby the difference between the opening and closing price is exchanged. CFD traders do not own the underlying asset and positions are leveraged. CFDs comprise one of the largest parts of the global financial markets.
What Is A CFD Trading Account?
A CFD trading account allows you to open CFD positions and speculate on rising and falling prices within global markets. You can practice trading in a risk-free demo account with most good brokers.
Is CFD Trading Halal?
CFD trading is not Halal or Haram, as it involves leveraging a stock value to earn profit, without taking any ownership of the product. This is known as a Riba and is prohibited in Islam. However, it is possible to trade CFDs Riba-free using a swap-free account.
Is CFD Trading Safe?
CFD trading is safe as long as you are using a regulated and trustworthy broker. UK-regulated brokers offer good levels of trader safety, including financial compensation and negative balance protection. It is also vital that you do thorough research into the risks around leveraged trading.
Is CFD Trading Gambling?
CFD trading has similarities with gambling in terms of how it can be described, however, it is not strictly gambling. Whilst there is an element of risk by taking a chance, or gamble, on a venture, there is a lot more skill required when trading (as long as it’s done correctly). Traders need to use analytical foresight to trade successfully, thus being considered more as investors, not gamblers.
Is CFD Trading Legal In The UK?
CFD trading is currently legal in the UK. Make sure you choose a regulated and licensed CFD broker offering the correctly regulated leverage limits. Note that as of January 2021, crypto-derivative retail CFDs are banned in the UK.
Is CFD Trading Taxable In The UK?
CFD trading is exempt from stamp duty tax in the UK because you do not own the asset. This may differ if you are in a jurisdiction other than the UK. Note that CFDs are still subject to capital gains tax. You can find out more from the HMRC website or here.
CFD Trading: Is it Legit?
CFDs are a legitimate form of trading on a range of global markets. Note that whilst most brokers you find will offer CFD trading, not all of them are regulated companies. It’s important to thoroughly research your broker before committing money.
Is CFD Trading The Same As Spread Betting?
CFDs and spread bets are both leveraged products, with no ownership of the underlying asset. The main difference between CFD trading vs spread betting, is the way they are taxed (CFD trading is subject to capital gains tax, whilst spread bets are not). Spread betting also involves staking money per point of price movement. Whether you choose CFDs or spread betting, it’s important to understand their subtle differences.
Is CFD Trading The Same As Binary Options Trading?
Binary options are also a financial derivative in the form of a contract, but they do operate slightly differently. The main difference between CFD trading vs binary options is that CFDs involve exchanging the price difference of an asset, from open to close, whilst binary options allow you to buy or sell the right (but not the obligation) to trade at a fixed price, for a set period of time.
Is CFD Trading Profitable?
It is possible to make money with CFDs, however, leveraged trading can also lead to significant losses. Traders will need to practice their trading skills, be disciplined and be patient in order to be successful at CFD trading.
What Are The Advantages of CFD Trading?
CFD trading allows your capital to stretch further by using leverage to put down a fraction of the full trade value. It is also more flexible than other types of trading and comes with some tax benefits. You can also use CFDs to start buying and selling a wide range of diverse markets.
What Is A CFD Trading Platform And How Does It Work?
A CFD trading platform provides access to the online financial markets, where you can open, manage and monitor positions from your desktop or smartphone device. Trading platforms vary in terms of the specific features they offer, but many include automated trading capabilities and risk management tools.
CFD Trading: What Does It Mean?
CFD trading involves speculating on the price difference between an asset, such as a forex pair, without buying and selling the underlying asset. It’s offered by top online brokers such as XTrade and Trading 212.
Is CFD Trading Worth It?
Determining whether online CFD trading is worth it is entirely down to the trader’s preferences and experience. Once you have honed your skills and strategies, CFD trading can be profitable, but the risks and subsequent losses can also be substantial if correct strategies have not been employed.