When choosing a CFD broker, you need to compare more than just costs. Here is an expert ten-step guide to the major points you should consider to help you find the most appropriate CFD broker for your CFD trading.
1. Make sure you understand what CFD brokers offer
CFD trading is speculating on financial markets with derivatives. Traditional investing involves paying outright for shares in companies, whereas with a CFD, you are entering into a “contract for difference” between the opening and closing prices of a position.
CFDs are a form of leveraged trading that enables traders to essentially buy more than they can afford by trading on margin. This means that instead of paying full price for £1,000 worth of shares, by using a 10% margin, traders can speculate on £1,000 worth of shares with £100 on the account. You do not own the underlying shares with CFDs but are buying or selling 1,000 CFDs instead of 1,000 shares. Your profit and loss on 1,000 shares will be equivalent to investing, but unlike buying physical shares, the amount you need to deposit with your broker will be less.
For example, if you buy 1,000 CFDs in a share worth £1, that position is worth £1,000. To do this, you will need to deposit an initial margin of 10% (£100).
If the share goes up by 10%, you make £100 profit, which is the equivalent of a 100% profit on your deposit. However, if the share goes down by 10%, you will have lost 100% of your deposit.
CFD trading is available to almost anyone who can access a broker online, including professional and retail traders. However, before opening a CFD account, you will have to demonstrate that you understand the risks involved.
Here's more about ECN brokers and STP brokers which may be of interest to more experienced traders
2. Compare the key features of what CFD brokers offer
When comparing CFD trading platforms, here are the main things you need to look at:
- A CFD broker’s trading costs (commission/spreads)
- The margin available (leverage)
- What CFD markets you can trade (indices, forex, stocks, commodities & treasuries)
- The regulatory status of a CFD broker
- The cost of overnight financing rates
- Retail versus professional account options
3. How to choose the cheapest CFD broker
The main things to consider when looking for the cheapest CFD broker are:
- Cost per trade: When comparing CFD trading brokers, the cost of executing a trade is one of the most important factors. CFD brokers either charge commission for DMA trading, but more frequently for retail traders (private clients), CFD brokers charge by widening the spread. As a trader, you should consider how often you intend to trade, because if you are a frequent trader who is attempting to make lots of profitable trades, a CFD broker that is 10% more expensive will have a significant impact on your overall profit and loss.
- Inactivity Fees: If you do not intend to be a regular trader then you need to consider if your CFD broker will charge you an inactivity fee. An inactivity fee is simply a fee that brokers will deduct from your account if you do not use it. There are compliance and regulator costs for CFD brokers to keep accounts open, so CFD platforms charge this fee to cover the cost of dormant accounts. Inactivity fees usually start at around £10 per month. Inactivity fees will stop when your account balance reaches zero, at which point, a CFD broker may automatically close your account if it has not been used in a while.
- Overnight CFD Financing Charges: Overnight financing fees are charged in CFD trading when you hold a position overnight. Because essentially, a CFD broker is lending you money to trade. If you are trading on a 20% margin and want to trade £10,000 worth of shares, you will need to put down a £2,000 deposit as the initial margin. Then the broker will charge interest on the remaining £8,000. Some say these are hidden CFD charges as most traders don't notice them or even have any idea what they are being charged for. Here's an explanation of overnight trading fees and charges for CFDs & Spread betting.
- Frequent CFD trader discounts: CFD traders who execute more frequently can sometimes expect a reduction in commission or spread prices. However, you will need to be doing significant volumes. Commission and spread discounts normally take the form of rebates. A frequent CFD trader rebate is when a CFD broker will refund some of the commission or spread you have paid over a month. CFD brokers tend to pay these in arrears as they are based on the previous month’s trading.
3. Choosing a CFD broker that offers DMA CFDs
The main advantage of DMA (direct market access) CFD trading is that you get better prices.
For normal investing, a stock broker will charge a commission after you buy shares, but for CFD trading, the commission is included in the spread. Unless you are trading DMA. DMA means direct market access, and your orders sit directly on the exchange. You get a clean price and your commission is added afterwards.
Being able to buy at the bid rather than the offer and sell at the bid rather than the offer can make a big difference to when you enter and exit positions.
4. Choosing a CFD broker based on margin and leverage
CFD trading margin is the deposit you have to have in your account to put on a trade.
It varies from broker to broker and the lower the margin requirements, the more exposure you can have with the least funds on the account. You can compare the CFD trading margin in our comparison table, but beware, the lower the margin, the riskier a trade, as you are leveraging your money sometimes up to 500 times.
So, if you have £1,000 on account, you could have £500,000 of exposure. If a price moves 10%, you have lost £50k, meaning that you owe the broker £49k. Many brokers now are introducing no negative equity protection, which means that you can never lose more than your account balance. Of course, this means that the leverage on offer will be reduced.
5. Choosing a CFD broker based on what markets can you trade
This means how much access your broker provides. The more the better, as you want flexibility when trading to give you as many opportunities as possible.
The major markets for CFD trading are:
- Forex
- Indices
- Shares
- Commodities
- Treasuries
6. Choose an FCA-regulated CFD broker for CFD Trading
Never go with a broker that is not fully authorised and regulated by the FCA or some of your funds are not covered by the FSCS scheme. Most client funds are segregated now, but if your broker goes bust, provided FCA regulation and FSCS contributions are up to date, the Government will cover your deposit losses up to a certain point. You can view more information on the FSCS website here.
Here’s where to find a CFD stockbroker and how to spot brokers to avoid.
7. Understand how CFD brokers make money
When you open a CFD position, your CFD broker takes the opposite or opposing side of the trade. So, for example, if you choose to open a long (buy) position on 5,000 shares of ABC Inc. at $10.00 per share, your broker will incur a short position in 5,000 shares of ABC Inc. at $10.00 per share.
You and your broker are the counterparties to the CFD trade. The profit and loss, or exchange of cash flows in the trade, will be between those two counterparties and no one else.
The CFD provider has three potential sources of income.
- Trading Revenue: it’s common for the broker to charge a commission or widen the spread around the market. If a broker offers DMA, CFD trading commission will be added post trade, otherwise, CFD commission will be built into the spread around the underlying market bid/offers.
- Financing Charges: if CFD positions are held open overnight then a financing charge is applied and is typically set at a percentage above and below an interest rate benchmark. For example, funding might be set at + or - 2.50% over LIBOR. The mark-up over the benchmark creates another source or venue for the CFD broker. CFD traders pay to fund long positions overnight, and when interest rates are normalised, they can receive funding on their short positions. However, with interest rates at close to or even below zero, that tends not to be the case.
- B-Book: if the broker opposes its client’s positions and does not hedge that exposure then the broker’s trading P&L will be the inverse of its clients, such that it will make money if they lose and lose if they profit. Whether the broker hedges its position or opposes them is a commercial decision. However, if we assume that brokers hedge, then having written a CFD to their client, the broker now has an equal and opposite position to them – shorts to their longs and longs to their shorts. In our hedged example, the broker will enter the exchange-traded market and trade against their position by selling stock against a long position (a client short position) or buying stock against a short (a client long position). If the broker purely acts as an agent however, then they will not hedge against a client’s short position in this way. Rather, they will sell stock in the market and borrow the stock from a third party, for a fee, to make delivery/settlement of the physical stock. If a stock is in demand, then additional fees may be incurred in borrowing the stock, and these may be passed on to the end client.
8. Understand the pros and cons of CFD trading
There are many benefits of trading CFDs, but there are drawbacks too. Here's a summary of the main pros and cons of CFD trading.
| Pros of CFD trading | Cons of CFD trading |
| Leveraged trading | High-risk instruments |
| Trade long or short | No ownership or voting rights conferred |
| No stamp duty | May not rank equally for dividends or corporate actions |
| Low commissions | Not economic for long-term positions |
| No fixed expiry dates | Margin requirements + P&L swings can force traders out of positions prematurely |
| Cash settled | Profits are subject to UK Capital Gains Tax |
| DMA/online trading | Counterparty risk resides with the broker and not a clearing house or central counterparty |
| Daily funding | |
| 24-hour markets available | |
Trading CFDs offer numerous benefits when compared to other products.
First of all, they are leveraged products, which means that traders can take and hold larger positions in the market than they might otherwise be able to afford. CFD trades on UK and Irish equities attract no stamp duty, creating an immediate cost advantage when compared to trading physical stocks. This can be a material difference for those trading an active strategy.
Because CFDs are cash-settled and not deliverable contacts, traders can take long or short positions with equal ease.
Being able to trade on the short side opens up many more trading opportunities and allows traders to profit from or hedge against the effects of falling markets.
Because of the leverage in CFD contracts, traders do not need as much capital to trade CFDs as they would to trade comparable positions in physical stocks and shares. CFDs have no fixed expiry dates and are priced to reflect the cost of carry. This means that they are transparently priced and ideal for trading on a short-term basis.
CFDs opened and closed within a business day attract no overnight funding charges, though CFD positions held open over prolonged periods may prove to be uneconomic because of those daily funding charges.
CFDs on leading equity indices and some shares can be traded 24 hours per day, providing a further degree of flexibility to traders. And the larger CFD providers offer a near-global coverage, with thousands of instruments available.
Here's how to choose an equity CFD broker.
CFD trading offers low commission rates or sometimes a flat fee per deal, and active traders can receive rebates or reduced commissions, which can bring down the trader’s cost even further.
CFD trading is mostly conducted online using state of the art trading platforms that have charting, news flow, position and money management functionally built-in.
CFDs are leveraged derivatives and they are considered to be high-risk products because trading losses can, in theory, exceed initial deposits though UK retail benefit from negative balance, meaning they cannot incur losses larger than their deposits.
Before you can open a CFD trading account, you will need to demonstrate that you understand the risk involved and the way that CFDs operate. Clients need to remember that leverage can magnify trading losses just as easily as trading profits. CFDs offer no ownership of the underlying assets that the contracts are over and CFD traders take on the counterparty risk of their broker.
This means that if the broker fails, those contracts have no value. Retail CFD traders in the UK are however protected by the Financial Services Compensation Scheme up to the value of £85,000.
Whilst CFDs do not attract stamp duty, profits made through CFD trading are subject to UK capital gains tax, and traders need to allow for these liabilities and ensure they keep proper trading records.
CFDs are a highly flexible way to trade the financial markets, though they are not without their drawbacks and are not suited for use in long-term investment planning, and only risk capital should be used to trade them. That said, they can provide long-term investors with a way to hedge portfolio risk in periods of market volatility, and for traders to create market neutral pairs trading and spread strategies.
As with all geared derivatives, CFDs were designed to allow traders to diversify risk. The problems with them tends to arise when traders use them to concentrate risk instead.
9. The process of opening a CFD account
If you want to be a better CFD trader, our guide, How to trade CFDs, can give you an advantage by offering free tips, trading strategies and an overall understanding of what CFD trading involves.
The process for starting to trade CFDs is:
- Compare CFD trading accounts: When you are comparing CFD accounts, it is a good opportunity to decide if you want to trade on margin with a CFD or a financial spread bet. Whilst both CFD and spread betting offer leveraged trading, there are some differences between the two (like tax, for instance). Read up on the key differences in What’s the difference between CFDs and spread betting?
- Choose a CFD broker: Once you have decided that CFD trading may be for you, choose a CFD broker based on what is most important to you. The key things to consider when choosing a CFD broker are available markets, costs, fees, trading platform features and customer service. You can compare CFD brokers in the main comparison table or read our broker reviews, which highlight what individual CFD brokers are good at.
- Research a CFD trading strategy: Some very basic strategies can be valuable to new CFD traders, such as portfolio diversification, maintaining adequate risk capital and understanding the markets that you trade. Be careful when looking for CFD strategy information that you avoid CFD scams and beware of CFD educational providers, as many are only there to charge you for basic information.
- Open your account: When you have picked a CFD broker and decided to open an account, you will have to demonstrate that you understand the risks involved in CFD trading during the application process. For AML (anti-money laundering) requirements, you will also have to supply identification documents and proof of address.
- Pick your market / CFD trade type: Once your account is open and spending on what broker you have picked; you should have access to the global markets via CFDs. Decide what you want to trade by researching the underlying markets. The more you understand what you will be speculating on, the better chance you will have of success.
- Deposit funds: Most CFD brokers offer deposits via card or bank transfer. Some offer deposits by services like PayPal. Card and bank transfer are usually the quickest and cheapest ways to fund your account. It’s important to note that due to AML, you can only withdraw funds back to the method you deposited from.
- Making your first CFD trade: As CFD trading is high risk, it is sensible to start small and to not put all your eggs in one basket. By not risking all your capital on one trade, you will gain a gradual understanding of how the market moves and your positions react in a live environment. Trading with real money is very different from trading on a demo account.
- Setting up stop losses: A major element of CFD trading is “protecting your downside”, which means using a stop loss to minimise your losses. A stop loss will automatically close a position at a level you set, even if you are not there to click the buy or sell button.
10. Our rankings of the best CFD brokers in the UK by category
Our CFD broker comparison tables display only UK CFD brokers that are properly regulated to offer CFDs to UK traders. Our rankings are based on extensive product testing and our industry survey, which measures customers’ satisfaction on 10 key CFD account features.
Best Overall CFD Brokers
- Saxo Markets
- IG Markets
- CMC Markets
Saxo Markets gets the top spot as the best overall CFD brokers, as they offer one of the OTC and DMA CFD trading on a very broad range of markets. Saxo Markets, as with CFD trading, is aimed more at semi-professional traders.
IG comes in a close second as it also offers DMA CFD trading, but is not quite as heavy-duty a trading platform.
CMC comes third as whilst they offer a very broad and competitive CFD product, there is no DMA CFD trading for stocks.
Best CFD brokers for beginners
- IG
- CMC Markets
- eToro
As stated above, IG have an excellent CFD trading platform and offer access to a very broad range of markets. The platform is simple to use, with a clear layout. IG also have a reputation within the industry for having their clients’ interests at heart (as you read in our interview with the CEO, June Felix) and do not B-book clients (profit from client losses). If you are looking for your first CFD account, IG is a good place to start as they cater for all types of clients, from absolute beginners to hedge funds and institutional traders.
CMC Markets is also good for beginners as their platform is one of the most comprehensive around without being too institutional-based. The platform gives the feel of trading like a professional, but everything is easy to configure and there are some good sentiment tools for new traders to get an idea of what other CMC Markets customers are trading.
eToro, despite its reputation for being a bit trendy, is a fairly good platform to get started on. Toro offers a very wide range of markets to trade and the platform is quite user-friendly (almost to the point where it suckers you in). There are some very annoying features like only being able to trade in USD. So, if you buy a UK stock, your P&L will be in USD (eToro makes additional money on the foreign exchange conversion). There is a fairly large community of traders and you can opt to see (and copy) what other traders are buying and selling. However, it’s not a platform for serious traders. But if you want to dip your toe into CFD trading to see exactly how hard it is then eToro is worth considering before you graduate to a more sophisticated platform.
Best CFD brokers for professional traders
- Saxo Markets
- Interactive Brokers
- IG
All three of these brokers have something in common – they all have their own proprietary trading CFD platform in that they built it themselves for their customers.
Saxo Markets is one of the best CFD brokers for professional traders, predominantly because their client base is generally more sophisticated than other CFD brokers. As such, their trading platform has been designed with professional traders in mind with DMA access, physical trading on a robust, institutional-grade platform.
Likewise, IG and Interactive Brokers (IBKR) both offer DMA trading and physical investing.
Whilst both IG and IBKR both offer institutional trading for hedge funds and professional traders, IBKR (as with Saxo Markets) also offers on-exchange futures and options trading, so comes in second and IG, third.
For more information on professional trading accounts, see our dedicated pro trader comparison page.
Best CFD brokers for Forex
- CMC Markets
- Saxo Markets
- IG
CMC Markets won best forex brokers in our Good Money Guide 2020 awards on the basis that the entire brokerage was founded to trade forex and was one of the first to offer it to private clients. CMC Markets hasn’t lost focus over time and offers forex trading via CFDs on a wide range of markets with really tight spreads. If you only plan to trade outright forex CFDs then CMC Markets should give you everything you need.
Saxo Markets and IG have excellent forex trading offerings too, although whilst IG has a broad forex CFD universe, their spreads are a little wider.
See a detailed comparison of forex brokers in our comparison table.
Best CFD brokers for Commodities
- IG
- Saxo Capital Markets
- Interactive Brokers
Whilst every CFD broker under the sun will probably offer access to gold, silver and crude oil, a good CFD broker for trading commodities should also include the lesser traded softs and exotic commodities. IG has one of the broadest ranges of commodities trading via CFDs.
Saxo Markets and Interactive Brokers of course offer DMA commodities trading, but if you want the simplicity and flexibility of trading commodities via CFD then IG have an excellent offering. For a full breakdown of CFD brokers that offer commodities trading, view our comparison table.
Best CFD brokers for index trading
- IG
- CMC Markets
- Saxo Markets
Index trading is fairly straightforward and is second only to forex trading in popularity, and IG is the original index broker; IG also offers CFD trading on over 80 global indices, as well as ETFs. Spreads are competitive and IG also offer index trading at the weekend on European, UK, Asian and US indices. IG offers CFD trading on over 80 global indices, as well as ETFs.
CMC Markets comes in a close second as their primary focus is Forex.
Saxo Markets are also a good choice for trading indices via CFD, and for more information, you can compare all brokers for trading indices here.
Best CFD brokers for UK Stocks
- IG
- Saxo Markets
- Spreadex
If you are trading UK stocks via CFD then IG is your best option because they offer some unique trading features that others don’t. For instance, you can trade CFDs on the grey market price of an IPO before it lists. IG offer out of hours trading on UK stocks, as well as CFD trading on smaller cap UK stocks.
Saxo Markets has a great offering for UK CFD trading and also the option (as with IG) to trade UK stocks via DMA.
Spreadex is also worth a look as they have recently launched CFDs (in addition to spread betting). Spreadex are a much smaller broker but offer personal traders who can work CFD orders on smaller stocks on request.
Best CFD brokers for US Stocks
- Interactive Brokers
- IG
- Saxo Markets
If you are going to trade US stocks via CFD, you may as well do it with a US broker, and the best of the bunch is Interactive Brokers, AKA IBKR for short. IBKR was the pioneer of electronic trading (read up on them in our interview with Thomas Peterffy, the founder and CEO). While the Americans are not allowed to trade CFDs themselves, IBKR offer CFD trading through their UK office.
Saxo and IG are a close second and third as both brokers offer round the clock CFD trading on US shares. Both brokers offer DMA and out of hours trading, although IG pips Saxo to second place because of their presence in the US (albeit for forex trading only).
Best CFD brokers for MT4
- Pepperstone
- Saxo Markets
- IG
MT4 brokers are a dime a dozen and there are so many terrible ones, to be honest. MT4 is the most popular trading platform out there because of its plug and play nature.
Pepperstone, one of the largest brokers globally, but HQ’d in Australia, offers MT4 and is worth a look as they won “Best MT4 broker” in our 2020 awards.
While not overly promoted, IG and Saxo also offer MT4 as a trading platform option, should you find their proprietary trading platforms not sufficient for your needs.
Best CFD brokers for options
- Saxo Markets
- IG
- Spreadex
CFD trading on options has grown in popularity as brokers try to compete on market coverage. Most CFD brokers offer a smattering of CFD options on the most popular traded instruments, but Saxo Markets stands out, with an excellent options board on a wide range of markets. For more information on brokers offering options trading, view our options broker comparison table.
Best CFD Brokers for market coverage
- IG
- Saxo Markets
- Spreadex
While you can trade more things with Saxo Markets overall, IG has one of the widest choices of markets to trade CFDs on. If you want to trade something unusual, Spreadex will also look at markets on request.
Best CFD brokers for trading platforms
- Saxo Markets
- IG
- CMC Markets
Saxo Markets has the best platform for trading CFDs available to private clients. You can work a significant number of algo-based orders, as the CFD trading platform is designed with professional traders in mind.
IG’s CFD trading platform is a great all-rounder, and CMC Markets makes you feel a bit more like a pro with its easily configurable layout and trading tools.
Best CFD brokers for spread costs & margin rates
Margin rates are the same for every broker and spreads change every month. Many brokers run special promotions with reduced spreads. Whilst some have fixed spreads, no matter how wide the underlying markets, for example. For example, economic indicators like non-farm payrolls can make the market more volatile and widen spreads. Whereas, high market liquidity times like the open and close can mean that spreads are tightened. The general norm though is for brokers to offer spreads slightly wider than the underlying bid/offer to incorporate their commission.
Best CFD brokers for high net worth individuals and large traders
- IG
- Saxo Capital Markets
- CMC Markets
If you are a big CFD or spread betting trader (and by that we mean £50k upwards), you need a broker that is going to give you a bit more than just the top ten traded forex pairs and a few commodities.
IG tops this list as they are a publicly listed CFD broker and offer DMA CFD trading and a personal service for larger clients.
Saxo Capital Markets is another good CFD broker for HNWs, as you can trade DMA, buy physical shares, bonds, and trade all sorts of exotic derivative products. They also have professional brokers available over the phone for trading if you want to work VWAP or other algo orders that may otherwise move the market if you did them yourself.
Best CFD brokers for research and technical analysis
- IG
- Saxo Markets
- CMC Markets
Most CFD brokers provide some kind of research and analysis on the markets for their customers. But generally, the better the broker, the better the research, tools and analysis. For example, some brokers like IG will provide lots of analysis tools, economic calendars, stock screeners and technical analysis signals. Whereas, others like Plus 500 will only provide a trading platform with no added value. It costs a lot of money to hire analysts and provide data to clients, and some of it (if you know how to use it) can be exceptionally useful.
Technical analysis provides a good overview of the markets, based on charts and historical data
- Fundamental analysis uses company financial releases to evaluate the health of a share price.
- Economic data and calendars show when important announcements are due that could result in a price move.
Here's where you can find out about 2020's award-winning brokers.
CFD broker FAQs
Can you lose more than you deposit from CFD trading?
Yes. If you have a professional trading account, you can lose more than your account balance.
However, for traders classified as retail clients, there is negative balance protection, which means that your account is guaranteed to not go into negative equity.
How long can you hold a CFD trade open?
In theory, you can keep a CFD trade open indefinitely. However, as overnight financing charges can add up quickly, CFD trading is more of a short-term speculation tool or hedge rather than a product for long-term investing.
Is CFD trading taxable?
Yes. You have to pay capital gains tax on CFD trading profits. You can offset CFD losses against other investment profits.
What are STP CFD brokers?
STP means Straight Through Processing, which means that when you put an order in, it goes into the market and the broker buys or sells on your behalf. The alternative is where a broker matches up with other traders or does not hedge your positions at all. In the grand scheme of trading, it does not matter whether your broker is STP or uses a B-Book. You make money if you call the market right. You can't blame the broker if your trades are not profitable.
Which CFD brokers offer the tightest spreads?
When choosing a broker, the spreads and commission you are likely to pay are going to be high up on your list of priorities. However, it shouldn’t be the only consideration you make. You should also consider market range, customer service and trading platforms.
Which is the cheapest CFD broker?
There is no single answer to which is the cheapest CFD broker as there are too many contributing factors to accurately calculate which CFD broker is the cheapest.
What Does Leverage Mean on CFD Accounts?
CFD trading means investors can leverage their money (or capital) to increase their exposure by trading on margin.
CFDs allow those investing to take larger positions than they would be able to do through traditional investing. The benefit is that your profits are multiplied.
However, inversely, if you lose money, your losses are equally multiplied.
Do CFD brokers charge commission?
Widening the spread is equivalent to charging a commission.
It is not normal for CFD brokers to charge private clients and retail traders a commission for CFD trading. Normally, it's only DMA (direct market access) CFD brokers that charge commission.
One of the advantages of trading CFDs is that the commission is built into the price you buy and sell at, so there is no need for additional calculations to determine your profit and loss after the commission is charged.
The disadvantage of this is that when trading CFDs, the bid-offer spread will be wider, so the market needs to move further before a trade turns profitable.
Why is the CFD Spread Important?
The tighter the spread, the better, as this reflects what your trading costs are.
The spread is usually a fixed amount per share and for things like Forex and Index trading and is comparable to a percentage. For example, the spread on Vodafone shares could be 0.25% from the actual price, and this represents a commission of 0.25% on the value of the trade.
Or if you are trading the FTSE 100 and the market price (or bid/offer) is 5801 (to sell), 5801.5 (to buy), a CFD broker may offer a spread of 5801 (to sell) and 5802 (to buy), which means they have widened the spread by 0.5. The size of the bid-offer spread quoted by a CFD broker is important because it has a big impact on the cost of your trading.
If a CFD platform quotes spreads that are 0.5 points wide and you are trading 1,000 CFDs, the cost of each trade will be £5. So, if you trade 100 times over a year, you will have paid £500 in dealing costs. But, if that spread is 1 point instead of 0.5 points, you will have paid £1,000 in spreads.
The difference of £500 can have a significant impact on your profit and loss.
How important is CFD spread width when trading CFDs?
As you have to sell at the lower bid price and buy at the higher offer price, the closer the two prices are, the less the market has to move in your favour before you can lock in a profit.
If you are scalping the market and trying to make lots of small, profitable trades, the tightness of a spread can make all the difference between success and failure.
Essentially, narrower spreads mean quicker potential profits and wider spreads mean greater price changes needed to make a profit.
Do I need a DMA (direct market access CFD) broker?
If you’re a professional trader dealing in significant sizes and frequently, you will get much better execution prices if you deal through a DMA CFD broker.
As the commission is charged after a DMA CFD trade, it is easier to make small, profitable trades as the bid/offer spread is tighter.
However, you will have to calculate your commission in your P&L as it may turn a profitable trade into a loss.
DMA CFD brokers are usually only suitable for clients that qualify for institutional traders or private clients with professional account status, who have a thorough understanding of CFD trading.
How to check if a CFD broker is regulated by the FCA (Financial Conduct Authority)
All CFD trading brokers listed in our comparison are regulated by the FCA.
You can check whether a broker is regulated by the FCA in the UK by checking the FCA register.
Only fully FCA-authorised and regulated brokers offer client funds protection under the FSCS. From the 1st September 2019, this protection extends to:
- Limiting leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that the CFD provides.
- Closeout a customer's position when their funds fall to 50% of the margin needed to maintain their open positions on a CFD account.
- Provide protections that guarantee that a client cannot lose more than the total funds in their CFD account.
- Stop offering monetary and non-monetary inducements to encourage trading.
- Provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses.
source; FCA website, 01/07/2019.
Can US residents trade CFDs?
Unfortunately, you can't trade CFDs in the US.
Derivatives trading in the US needs to be done on regulated exchanges. As CFDs are an OTC (over the counter) product, they are not allowed and are illegal to offer to US residents.
Therefore, if you want to trade on margin, you must do it with either futures, options or through a broker that offers margin trading.
Plus, to make it even worse, if you are a US citizen or resident, you can't trade CFDs with a UK broker.
UK and US regulations prohibit US clients trading with overseas brokers. But if you are a UK or European trader, you can trade US stocks on CFDs with a UK CFD broker.
You can however compare US CFD stock brokers where you can usually trade on margin.
The US equivalent of CFD trading is margin trading.
Margin trading in the US is where a broker lends you money to buy shares.
So, unlike CFDs, where you are not buying shares but taking out a “contract for difference” with US margin trading, you are paying full price for the shares you want to buy.
You will need to put down some initial margin of (for example) 25%. Then the broker will lend you the rest of the money for the purchase.
For instance, if you want to buy $1,000 of Apple shares, you will need to put down $250 and the broker will lend you the other $750. You cannot withdraw money a US broker lends you and you pay daily interest on what you borrow.
What's the difference between CFD trading and spread betting?
Spread betting and CFDs are fairly similar in some respects but very different in others.
The key similarities for both financial spread betting and CFD trading are:
- You can go long and short
- You can trade on margin
- Both are OTC derivative products
- Both are regulated by the FCA
- Both are a high-risk investment product
The key differences between CFD trading and financial spread betting are:
- Spread betting is free from capital gains tax, CFDs profit and losses are taxable
- With spread betting, you bet a certain amount per point move
- With CFDs, you buy an equivalent amount of CFD as you would shares
- CFDs are available to international clients
- Financial spread betting is unique to the UK
Here's more information on the difference between spread betting and CFD trading.
Where can I find CFD Broker reviews?
Choosing a CFD broker is a matter of personal preference.
It can be based on anything from colour scheme to how friendly or efficient you find their customer support to the background information they offer.
If you want to read reviews of the major CFD brokers in the industry, our broker reviews for top CFD brokers can help as we ask three very simple questions:
- What do they do?
- How much do they cost?
- Are they any good?
Our CFD broker review includes interviews with CFD broker CEOs and the results of our customer satisfaction surveys, which rank brokers based on:
- Pricing
- Markets
- Size
- Customer service
- Trading platform
- Margin rates
- Educational material
- Trading tools
- Reliability
You can read reviews of the major CFD brokers here:
● IG review
● CMC Markets review
● Pepperstone review
● Saxo Markets review
● Interactive Brokers review
● Spreadex review
● XTB review
● ETX Capital review
● eToro review
● Plus 500 review
● City Index review
● Fineco review
Should I use an advisory CFD broker?
Advisory CFD brokers used to be quite common when it was harder to open a CFD account.
Before CFDs became available to all private clients, investors wishing to trade CFDs would have to prove that they understood the risks involved. As CFDs were mainly offered to sophisticated investors, the regulators were less concerned with the fact that advisory CFD brokers offered little added value to traders. However, CFDs are a very high-risk product and clients must understand the risks involved before opening an account.
Over the years, the FCA has clamped down on advisory CFD brokers providing advice and hardcore sales tactics used by CFD brokers to get clients to trade more. This website is all about execution-only CFD brokers – that means CFD brokers that do not provide advice or recommend trades. Here is how to find a CFD stock broker.
Can you make money trading CFDs?
If you want to be a profitable CFD trader then you need to follow some golden rules of CFD trading.
It’s not difficult to make profitable trades, but what is difficult is ensuring that you make more profits on your winning trades than you make losses on your losing trades. It’s a well-known fact that even the best traders in the world only get it right half the time. It’s how they manage their CFD positions that sets them apart and makes them better traders. Here's where you can find out more about how to trade CFDs.
What are the basic rules for trading CFDs?
- Don't trade with more than you can afford to lose
- Run your profitable trades
- Cut your losing trades quickly
- Use stop losses to minimise risk
- Combine technical and fundamental analysis before trading
- Don't trade with more than you can afford to lose
You should not risk money by trading CFDs that you need for something else. CFD trading is high risk and there is a high probability that inexperienced traders will lose money quickly. CFD trading can successfully form part of your overall investment portfolio. Around 10% is a suitable percentage to assign to high-risk investments.
It’s important to budget and balance your portfolio to include a range of diversified low, medium and high-risk investments, with a larger portion being allocated to medium and low-risk, long-term investment products such as tax-efficient SIPPs and stocks and shares ISAs.
If you only have a small amount of money to invest and choose to trade it all through CFDs, there is a large chance that your entire risk capital will be eroded as you learn to trade CFDs.
- Run your profitable trades: Managing a position is one of the most challenging aspects of trading CFDs. CFD traders are often too keen to take small profits, rather than keep a winning position alive. Using trailing stop losses can be effective in running profitable positions as the market moves in your favour. If you buy as the market is going up (or go short as the market is going down), it is more profitable to keep the position open and ride the trend as far as you can.
- Cut your losing trades quickly: Another key mistake that CFD traders make is to let losses increase without closing a position in the hope that the market will turn around. When trading, it is good practice to have a loss limit in place so that your profitable trades are not wiped out by a large loss. If you have a losing position, consider closing it and re-evaluating the market and trying again when the market is looking more predictable.
- Use stop losses to minimise risk: Using a stop loss means having a level in the market where your position is automatically closed to minimise loss. Stop losses are triggered automatically, even when you are not in front of your trading platform. The benefit of using stop losses is that you limit your downside risk (loss) on a position automatically and protect your account balance. Some CFD brokers offer guaranteed stop losses, which trigger even if the market crashes, and guarantee to give you your stop price, regardless of slippage.
- Combine technical and fundamental analysis before trading: The two most common forms of generating trading ideas are fundamental and technical analysis. Fundamental analysis means looking at the financial health of a business or economy. Technical analysis means looking at charting patterns of markets to see what has happened in the past and what is likely to happen in the future. The benefits of technical analysis are that it is somewhat self-fulfilling in that in the most liquid CFD markets, traders are looking for similar patterns and will trade when they occur, potentially moving the market. It is more popular in short-term trading. Fundamental analysis can be used to trade around economic indicators if you disagree with the consensus before the data is announced. Fundamental analysis is more popular for longer-term investing. For more information, read our guide on the difference between technical and fundamental analysis.
