A CFD broker is a financial services firm that offers contract-for-difference (CFDs) an over-the-counter (OTC) type of trading that enables traders to speculate on the price of underlying financial markets without actually owning the asset by either taking a long (buy) or short (sell) position directly with the broker.

How to choose a CFD broker - ten things you need to consider

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.

1. 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.
2. 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.
3. 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.

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

1. Saxo Markets
2. IG Markets
3. 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

1. IG
2. CMC Markets
3. 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

1. Saxo Markets
2. Interactive Brokers
3. 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

1. CMC Markets
2. Saxo Markets
3. 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

1. IG
2. Saxo Capital Markets
3. 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

1. IG
2. CMC Markets
3. 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

1. IG
2. Saxo Markets
3. 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

1. Interactive Brokers
2. IG
3. 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

1. Pepperstone
2. Saxo Markets
3. 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

1. Saxo Markets
2. IG
3. 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

1. IG
2. Saxo Markets
3. 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

1. Saxo Markets
2. IG
3. 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

1. IG
2. Saxo Capital Markets
3. 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

1. IG
2. Saxo Markets
3. 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.

We speak to Ryan O'Doherty  from CMC Markets about CFD (Contract for Difference) trading, what CFDs are, who they’re for, what you can trade, what are the main risks, the main benefits, and also, some top trading mistakes and how to avoid them.