CFD Trading is the buying and selling of “Contracts For Difference” – referred to as “CFDs”. They allow traders to speculate on price movements of an asset – both going up, or down (long or short). Often offered with leverage, they give traders the ability to speculate on stocks, forex, commodities or indices. As the underlying asset is not owned by the trader, no stamp duty is applicable to CFDs.
CFD Broker Comparison
Please note that you can change the symbol tracked in this chart, to any market you prefer trading on.
In this article, we will:
- Define a CFD and explain what it is.
- Show an example of a trade, with a short tutorial.
- Show advantages and disadvantages of this form of trading.
- Explain how to find the best broker account or software for you.
- Offer some “Beginners Tips” to help analysis
Contracts For Difference Defined
A Contract For Difference (or CFD) is a contract between a broker and an individual trader. It is a form of derivative. The difference refers to the value of the underlying asset at the time the contract is agreed (the strike price) and the value after the trade ends. It is essentially an agreement to exchange the difference in these two values.
The underlying asset is not brought and sold, but the contract allows traders to speculate on price movements of that asset
What is a CFD?
So a CFD is a derivative product. The trader does not own the underlying asset at any stage. Brokers create CFDs in a wide range of individual equities, indices, commodities and forex. The price is determined by the markets. The length of the contract will vary. Trades may last just a few seconds, up to months or years.
Puts or Calls
CFDs are generally used for shorter time periods (days or weeks) as more traditional investments are seen to offer better value over longer periods.
The contract features a ‘buy’ and a ‘sell’ price (known as the ‘spread’). This offers the chance for traders to go long (buy) if they believe market prices will rise, or go short (sell) if they believe market prices will fall. Buys or sells are also known as “puts” and “calls”.
If the market moves in line with the trade, profits from the contract will rise in line with that movement. Conversely if the market moves against the trade, losses increase. These contracts are often offered with a degree of leverage. This increases potential profits – but also potential losses – and therefore carries much greater risk.
An Example Of A CFD Trade
Here is a ‘walk through’ of a Contracts For Difference trade – a brief “CFD Tutorial”:
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.
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.
Trading CFDs – Key Points:
- A CFD is a linearly leveraged financial product. Profits and losses increase in direct relationship to market performance. The leveraged nature of CFDs mean, therefore, that your losses can exceed your initial investment.
- A CFD does not have a fixed maturity date. The trader will dictate when the contract expires. When you judge that it’s the right time for you to close a position, this is done by placing a trade of the same value in the opposite direction. Most brokers will however, make a very small charge for positions held overnight. Each charge is miniscule relative to the trade size – but is repeated each night.
How And Why CFD Trading Can Be Useful
Take a position in a falling or rising market
With the choice to go short or long, you have the potential to generate profits regardless of which way the market is trending. With traditional investment vehicles, it is more complex to profit from falling markets.
Hedge your wider investment portfolio
Where you are invested in physical shares, your hope and expectation is obviously that they will increase in value. You may also expect to collect a dividend. But where there is a very real risk of those shares leaking value, CFDs can play a useful hedging role.
So if you hold stocks in a certain company, short selling CFDs based on the same shares can be a useful way of making a profit from any short-term downtrend. In turn, this can partially or wholly offset any loss from the portfolio. This security measure can be an especially useful strategy to adopt in volatile markets.
While share dealing attracts stamp duty liability, the same does not apply to a CFD trade. Depending on your circumstances, any losses incurred may also be used to offset against your capital gains tax (CGT) liabilities.
Risks Associated With CFDs
Leverage and margins
To open a CFD position, it is necessary to deposit an amount in your brokerage account, known as a margin. This ‘position margin’ tends to depend on the size of your position and the type of underlying asset. The good thing about this is the ability to deposit a percentage of the full value of the position, which means your money linked to the position is not tied up in one transaction and can be used for other investments.
The downside is that it is possible not just to lose your initial deposit but also be required to make further payments.
CFD Trading – leverage risk
Keeping track of transactions
Failure to ensure you have enough funds in your account to cover total margin requirements could mean that some or all of your positions are closed out. Managing multiple CFD trades requires you to constantly monitor your account, depositing additional funds where necessary.
Use reputable, regulated brokers
In the UK, there are a great choice of reputable brokers. Fully regulated by the FCA. Traders can use these firms with confidence. This form of trading is not as strictly regulated as other forms of investment however, so you need to be selective when deciding on a broker. We offer more advice on finding the right broker below.
Is CFD trading for you?
CFDs offer a dynamic and sophisticated way of trading – although the possibility of losing more than your initial stake mean that it isn’t for everyone.
When looking for a platform, it’s important to opt for a format that you are comfortable with; one that allows you to keep control of your trades and one with a competitive spread – i.e. a narrow difference between buy and sell prices.
Find The Best CFD broker
How should you attempt to compare CFD brokers? And how might you identify the best broker? There are a whole host of regulated and secure brokers offering CFD (Contracts For Difference) trading – but how can you tell if one is “better” than another?
The answer will often need you to ask questions of yourself. The best CFD broker for one trader, will not necessarily be the best choice for another.
Here we cover some key comparison elements from the leading brokers reviewed on this site. Below that, we highlight some of the key areas where CFD brokers differ from one another. We also explain how you might compare them. The needs and trading style of each trader will be different. There is not one broker that will represent the best choice for all traders. Read on to find out which broker suits you best.
What are CFD brokers?
How To Compare CFD Brokers
Here the “Top 10” key comparison features, by which you can judge a particular broker;
- Spread / Commission
- Trading Platform
- Deposit and Withdrawal options
- Additional features
- Mobile App
- Range of Assets
We cover each section in detail below.
Spread or Commission
The spread or commission impacts every trade, and every trader. It is the ‘cost’ of making the trade. It is therefore a very significant value to compare when judging one broker or another.
There are complications however. The spread will differ broker to broker – but also asset to asset. So a broker may have the smallest spread for Forex pairs, but the largest for indices. Depending on what assets you to invest in, the broker might be the cheapest choice – or the most expensive. So when comparing based on the spread, ensure you are checking the spread on the assets you will be trading most.
Our cfd broker comparison table lists the most popular asset in each category, and the spread for that asset. Remember also, that a demo account is a great way to check spreads – particularly where they are variable.
Margin (or Leverage)
The margin is the percentage of the overall trade value that a trader must deposit (and commit) in order to open a trade.
So a £1,000 trade on the GBP/USD currency pair may only require a deposit of £50. The position however, has exposed the trader to £1,000 worth of risk (the risk of losing the entire investment is extremely small, but that is the value of the position) – hence the warning attached to CFD trading “losses can exceed your initial deposit“. Margin is also referred to as ‘leverage’. Where this is the case, the leverage is often illustrated in terms of multiples – so 200:1 would indicate leverage of 200 times the deposit. The equivalent margin would be 0.5%.
So when comparing brokers, a low margin requires smaller deposits. This will be important to some traders, but less so to others. Note high leverage means higher risk.
The actual trading platform is often not considered before a trader makes a broker choice. That however, could be a mistake. Most platforms will have similar functions – but as with anything, the usability and look and feel will be a matter of personal preference.
It is vital to be trading on a platform that is familiar and easy to use. It is not uncommon for traders to miss prices, or worse, make mistakes trading, because the trading platform did not suit them for whatever reason. The amount of flexibility may also play a role. If the platform can be resized, or reorganised exactly to your needs, trading becomes the only focus.
Deposit and Withdrawal options
Not your first consideration? If moving money in and out of trading accounts has been an issue in the past, it is worth checking. See if the methods you want to use to fund and withdraw from your account are available with each broker.
Features (Charts, Technical Analysis, Research)
If you plan to research your trades on the same trading platform where you ultimately trade, you want to ensure you have the best research tools available there. Charting standards do differ significantly. Some brokers offer outstanding charting facilities. Some deliver a range of technical analysis tools that will satisfy even the most ardent technical analysis experts.
The latest news may also available within the trading area, so research can be done from one place. Other platforms seem to assume traders will have already researched their trades elsewhere, and offer pretty basic charts and little in the way of analysis tools. If this is important to you, ensure your potential broker satisfies this need.
Support and Education
Many brokers will offer educational material to their clients. These might include ebooks, webinars or even one to one training where the client requests it. Again, this might be important to some traders but not to others. Likewise, the range of languages supported by the firm may also be a factor.
It is worth noting that brokers make money when traders trade. This means most educational materials will encourage lots of trading. Over trading is a frequent issue for many traders, particularly beginners. Those just starting out are also those most likely to look for learning tools.
The available support from a broker may be reassuring for some – others may not envisage ever using it. Potential new clients who do like to know they can contact a broker might like to establish the availability and contact methods for the support desk. Most firms offer a high standard of support.
Some other things that enable people to compare CFD brokers might include the quality and availability of a mobile trading application. As ever, trading on the move will be important to many traders – others will be happy to not use a mobile app.
It is very rare for brokers to not deliver a free mobile trading app. These run parallel to the main online site. Again, they have mostly been developed to a very high standard. While some firms may have delivered a poor mobile service in the past, they simply cannot survive without one now.
If you have a niche handset or mobile device, it may not be catered for. But mainstream users on iOS, android or Windows apps can be very confident any broker will deliver a very good mobile app to trade on.
This should be a key criteria for any broker. The strongest level of regulation for UK traders will be the Financial Conduct Authority (FCA). They regulate the majority of brokers on our pages. There are exceptions, but where this is the case, the alternative regulator must be listed with the FCA via the European passporting system of regulators.
A bonus or promotional code might also be a factor in a broker decision. The short term nature of these offers however, should mean they rank well down in the order of importance. Taking a worse spread in order to get a larger bonus makes no sense – but any trader who is likely to be successful will already know that.
A broader range of tradable assets does not always mean a better broker. However, if trading a specific asset is important – and that asset is not available elsewhere – then it might be a deal breaker. Again, the largest, more established brokers tend to have a bigger range of assets.
Our reviews cover all of the factors covered above. Generally the CFD brokers listed on our pages provide demo accounts. So traders can take their time, read the detailed review, and try out the platforms themselves before making a choice. Once you have all the information, you can then decide the best CFD broker for you.
Summary Of Broker Comparison Tips
- Consider your own trading methods. The trades, assets and frequency.
- Shortlist the cfd brokers that suit that trading pattern
- Consider demo accounts. Compare the trading platforms shortlisted.
- Identify the best choices for you.
- Deposit and trade
Remember: Traders can use multiple brokers, and use those with the best terms for specific trades or assets.
CFDs vs Spread Betting
On the surface, cfd trading and spread betting appear the same. There are however, subtle differences that are worth knowing, so that you can use the best investment type.
Both forms of trading allow traders to go long or short, and use leverage. Both are forms of derivative, so the underlying asset is not owned – therefore no stamp duty is applicable. Here are the main difference though:
- Deal Size. CFDs are normally based on the asset price, so a £10 per point contract on Vodafone for example, will cost less to open than a £1o per point position on the FTSE. The deal size for a CFD will depend on the asset price. With a spread bet, the trader chooses the size of the bet, and the asset price is not relevant.
- Capital Gains Tax. CFDs are liable for Capital Gains Tax (once over a certain size). Spread betting is not subject to CGT. However, this also means that CFDs losses can be claimed back in any tax return. That is not the case with spread bets. This can make CFDs more attractive when using them to hedge for example.
- Commission. CFDs on share can attract a commission, with spread bets, this cost is absorbed in the spread. This makes spread betting more attractive when buying smaller amounts of stock.
- Direct Market Access. CFDs often offer traders direct access to markets and order books for shares and forex. This is not the case with spread bets.
- Expiry. CFDs do not generally have an expiry. Spread bets on the other hand, will have a fixed expiry or ‘settled’ date at some point. This might be end of day, end of the week or months or years away – but there is a fixed point at which the bet ends.
Given these differences, it is worth considering which investment is the best tool, each and every time you open a position. What is “best”, will often depend on the aim of each trade and it’s size.