Contracts for difference, also known as CFDs, allow investors to speculate on the price of financial markets without taking ownership of the underlying asset. CFDs are also usually traded with leverage, meaning clients can increase their position size (and potential profits), in return for a small deposit. Both characteristics make CFD trading popular with beginners.
This guide explains how to get started trading CFDs. We cover the merits and drawbacks of contracts for difference, beginner-friendly trading strategies, plus the top brokers in 2022. Use our CFD trading for beginners tutorial to get started.
Leading forex and CFD broker since 2006, regulated in Ireland, Australia, Canada, Japan, Abu Dhabi, and South Africa. AvaTrade offers multiple trading platforms, including MT4/5, Web Trader, Mobile App, Vanilla options and Social Trading. +1250 Financial Instruments, Educational content and multilanguage customer support active 24/7. 20% Welcome bonus available on allowed countries.
Leading forex and CFD broker since 2006, regulated in Ireland, Australia, Canada, Japan, Abu Dhabi, and South Africa. AvaTrade offers multiple trading platforms, including MT4/5, Web Trader, Mobile App, Vanilla options and Social Trading. +1250 Financial Instruments, Educational content and multilanguage customer support active 24/7. 20% Welcome bonus available on allowed countries.
Reliable and affordable trading since 2009. Join over 900,000 others trading on 400+ CFD products over assets like forex, gold, indices, cryptocurrency and shares from 0.0 spreads through TradingView, MT4 or MT5. Vantage is ASIC regulated and client funds are segregated. Open an account in under 5 minutes.
Reliable and affordable trading since 2009. Join over 900,000 others trading on 400+ CFD products over assets like forex, gold, indices, cryptocurrency and shares from 0.0 spreads through TradingView, MT4 or MT5. Vantage is ASIC regulated and client funds are segregated. Open an account in under 5 minutes.
XM.com Offer a range of Account types and a low minimum deposit to appeal to all levels of trader. With 1000+ markets and low spreads they offer a great service.
XM.com Offer a range of Account types and a low minimum deposit to appeal to all levels of trader. With 1000+ markets and low spreads they offer a great service.
Skilling are an exciting new brand, regulated in Europe and beyond, with a bespoke browser based platform, allowing seamless low cost trading across devices.
Skilling are an exciting new brand, regulated in Europe and beyond, with a bespoke browser based platform, allowing seamless low cost trading across devices.
Capital.com offer CFDs and Forex CFDs on a huge range of assets, with competitive spreads and zero commission on unique platforms, including the fully functional mobile app.
Capital.com offer CFDs and Forex CFDs on a huge range of assets, with competitive spreads and zero commission on unique platforms, including the fully functional mobile app.
IG offer spread betting, CFD and Forex trading across a range of markets. They are FCA regulated, boast a great trading app and have a 40 year track record of excellence.
IG offer spread betting, CFD and Forex trading across a range of markets. They are FCA regulated, boast a great trading app and have a 40 year track record of excellence.
CMC Markets is headquartered in London and listed on the LSE (FCA Regulated). It offers competitive spreads on a global range of assets via its Next Generation platform.
CMC Markets is headquartered in London and listed on the LSE (FCA Regulated). It offers competitive spreads on a global range of assets via its Next Generation platform.
Trading 212 Offer a truly mobile trading experience. With tight spreads and a huge range of markets, they offer a dynamic and detailed trading environment. Recent customer care issues have severely damaged the reputation of the brand.
Trading 212 Offer a truly mobile trading experience. With tight spreads and a huge range of markets, they offer a dynamic and detailed trading environment. Recent customer care issues have severely damaged the reputation of the brand.
Alpari offer forex, CFD and binary options trading across a big range of markets with low spreads and a range of account types that deliver for every level of trader from beginner to professional.
Alpari offer forex, CFD and binary options trading across a big range of markets with low spreads and a range of account types that deliver for every level of trader from beginner to professional.
CFDs are placed using the trader’s understanding of the market, and the trader is hoping that the price of the underlying asset will rise or fall so that the position can be sold for a profit. Investors make money from the difference between the buy price and the sell price.
Because CFDs are leveraged products, there are also financing costs that must be paid on the borrowed funds that the broker provides. The formula to work out your returns when CFD trading is:
Closing sell / buy price – initial buy / sell price – (interest x number of days) – transaction costs = profit/loss
Importantly, CFDs are different from shares because there is no yield, so you can only make money from the transaction itself. This is because CFDs are a derivative – the trader does not actually own the underlying asset, for example a UK stock or gold. Instead, traders simply speculate on the price.
Credit: Skilling
Trading On Margin
Margin trading refers to investing a percentage of the total cost of an asset, and having the rest lent to you by a broker. This allows traders to take on bigger positions when they don’t necessarily have big capital to invest. The percentage paid by the investor is determined by the broker, regulatory requirements, and the asset traded, but typically it’s between 5% and 20% of the total position size. If the market moves in the way you have predicted, you can keep the return, and pay the same amount of money back to the broker (minus any fees).
Importantly, most FCA-regulated brokers cap leverage to 1:30 for retail traders. As outlined above, margin trading opportunities also vary depending on the asset traded, with most brokers offering lower leverage rates on volatile markets like cryptos.
Let’s look at an example of a leveraged CFD trade:
If you are looking to buy a share in a company that costs $200, and your broker offers CFDs with a 20% margin, then you are able to buy one share for $40 while your broker lends you $160. If your position is closed when the share price is $250, then you return the same $160 to your broker, get your $40 investment back, and also get the additional $50 from your trade. Subtract any fees, and that is what you are left with.
Credit: CMC Markets
The downside of margin trading is that the borrowed money always needs to be returned to the broker, even if the market moves against you. As a result, leveraged CFD trading can lead to large losses if a careful approach to risk management isn’t taken. Fortunately, many of the best CFD brokers offer negative balance protection, meaning you cannot lose more than your account balance.
How To Start CFD Trading
The first decision is which broker to sign up with. A useful tip is to find a brokerage that offers a free demo account. This will let you practice trading CFDs with virtual funds and gives you the opportunity to find a strategy that works, without risking your own money. You can then upgrade to a real-money account when you feel confident.
Here are a few other things to keep in mind when choosing a CFD broker:
What Are The Fees?
Brokers don’t tend to charge sign-up fees for CFD trading accounts. This is because platforms often make their money from spreads, commissions and margin losses. All of these costs should be compared. It’s also worth checking for deposit and withdrawal fees, plus hidden charges like account inactivity penalties.
Is The Platform Beginner-Friendly?
Some platforms are not suitable for CFD trading beginners. One terminal that is, however, is MetaTrader 4. MT4 is offered by many of the top brokers and provides a user-friendly interface alongside a decent breadth of analysis tools. Users benefit from 3 execution modes, 2 market orders, 4 pending orders, 2 stop orders and a trailing stop. Multiple charting views, including basic candlestick charts, are also provided.
MT4 is available as a software download, browser terminal, plus via a mobile app. And because it’s so popular, there is a wealth of guides and tutorials online to help beginners get started.
Are They Reliable?
Unfortunately, not all CFD brokers can be trusted. This is why it is important that British traders sign up with a brokerage regulated by the Financial Conduct Authority (FCA). This will provide new traders with several benefits, from negative balance protection and segregated client accounts to a ban on misleading promotions and a cap on trading leverage.
CFD Trading Strategies For Beginners
When looking at trading CFDs for beginners, there are two basic approaches for novices to get familiar with:
Long Buy
A long buy position is taken when you believe the value of an asset will rise. Let’s say you think the value of oil will increase following supply and demand challenges caused by the Russia-Ukraine war. A long CFD position could see you generate a return if the price increases beyond its current value.
Note, when we refer to buying, we are referring to opening the position, which does not actually mean you are purchasing the underlying asset (barrels of oil). What you are purchasing is a contract that allows you to exchange the difference in price between when you open the contract and when you close it.
Short Sell
The short sell might appear to be the more complicated strategy for CFD trading beginners, but the best way to look at it is as a reverse long buy. When you short sell, you borrow the asset in order to sell it, before buying it back at a lower price further down the line. This is done when you believe that the value of the underlying asset is going to decrease.
So, if you believe that the value of Bitcoin will decline, then opening a short position with a CFD could lead to a profit. If the price of BTC does indeed drop, then you will make money equivalent to the difference in unit price at open compared to the current price, multiplied by the size of the position, minus any broker fees.
Credit: IG
Learning
Having a basic strategy is a great place to start as a beginner to CFDs. But unless you continue to consume relevant material and commit to learning, you may see limited returns. We recommend setting aside time every week to get better acquainted with CFDs through the following:
Books – Books are one of the best ways you can immerse yourself in CFD trading. There are lots of great CFD trading books out there that come in the form of eBooks, audiobooks and physical copies, and many are specifically aimed at beginner traders. Content can cover everything from leveraged trading to risk management.
Courses – Courses are a great alternative to reading website content about CFDs or watching YouTube videos. Many courses are enough to help you progress from the beginner stage of CFD trading towards more advanced strategies and setups. Find a course from a highly rated provider that aligns with your budget. Note, some leading CFD brokers also offer free trading academies and tutorials when you open an account.
Online Community – Beginners can also turn to active investing communities available on social media channels and trading forums. Another great place to start is copy trading platforms. These applications allow traders to engage with experienced investors while mirroring their positions and strategies.
CFD Trading Tips For Beginners
It can be daunting to start trading with CFDs as a total beginner, however, with a supportive broker and the right mindset, it is possible to make money. We have also compiled a list of tips for CFD trading beginners.
Setting Up
One of the most important things to do before opening any positions is to research the market and confirm your predictions with technical and fundamental analysis. Also make sure you utilise stop-loss and take-profit orders to protect potential profits and limit any losses.
Discipline
When you start out, it’s easy to listen to a gut feeling or give in to emotions like fear or greed. However, this can derail an effective strategy and dampen the trading experience. Try and stay disciplined and follow your original approach. You can then review your progress and amend your trading system after it has run its course.
Broker
Finding a CFD broker might seem more like a formality than an important decision, but it can have a significant impact on your trading experience. Brokerages offer access to different markets with various fee structures, leveraged trading opportunities, supporting tools and more.
With this in mind, sign up with a reliable brand that comes recommended. Use our list of suggested brokers to start on the right foot.
Leverage
The leverage aspect of CFD trading can make investing risky. Beginners may not want to use all the leverage offered by an online broker. It’s also worth testing trading on leverage in a demo account before investing real money. This will help you understand the impact leverage can have on potential profits and losses.
Note, many of the top CFD brokers will lower your available leverage if you contact their support team.
Bottom Line On CFD Trading For Beginners
CFD trading for beginners can be a lucrative way to get into investing in the financial markets. Traders make a simple prediction on the value of an asset without actually taking ownership of the stock, precious metal or currency, for example. Trading on margin also means novice investors can get started with a relatively small capital outlay.
Use this beginner-friendly guide to trading CFDs to get started today and check out our list of recommended brokers here.
FAQ
What Are CFDs?
CFDs are contracts between an investor and a financial broker where both parties agree to exchange the difference between the opening price and the value of the asset when the contract is closed (minus any fees). CFDs are usually traded with leverage, meaning clients only need to put down a small amount of the total position size.
What Markets Can CFDs Be Used To Speculate On?
Novice traders can use contracts for difference to speculate on a long list of markets, from equities and commodities to forex and cryptocurrencies. Market access varies between brokers so make sure you check out reviews and ratings before opening a live account.
Are CFDs Legal In The UK?
It is legal to trade CFDs in the United Kingdom. However, not all online brokers and trading platforms are regulated by the country’s financial watchdog – the Financial Conduct Authority (FCA). Trading CFDs with a regulated firm normally provides retail investors with better trading conditions and greater customer protection.
Can You Make Money With CFDs?
Trading CFDs can be profitable, but it can also lead to large losses. The leverage element, in particular, makes contracts for difference a risky product. That’s why beginners may want to start with a demo account to build up their market knowledge and confidence.
Is CFD Trading Good For Beginners?
CFDs appeal to beginner traders for several reasons. Firstly, most brokers offer leveraged CFD trading, so investors only need to deposit a small amount of the total position, usually between 5% and 20%. CFDs are also a derivative, meaning traders don’t actually take ownership of the underlying asset, for example a precious metal like gold or silver. CFDs are also available on a wide range of traditional financial markets, plus new markets like cryptocurrencies.
