Best CFD Brokers 2022

How to choose a CFD broker

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.

In this guide to choosing a CFD broker here are the ten things you need to consider:

• Understand what CFD trading is
• Comparing CFD trading platform features
• Trading CFDs with the cheapest provider
• Do you need DMA (direct market access)
• What margin and leverage do you need
• Market access on different CFD trading platforms
• The regulation of CFD trading platforms
• How CFD trading platforms charge their clients
• The advantages of CFD trading
• The disadvantages of CFD trading
• Opening a new CFD trading account

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.

4. 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.

5. 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.

6. 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

7. 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.

8. 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.

9. Pros & cons of CFD trading platforms

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.

• Leveraged trading
• Trade long or short
• No stamp duty
• Low commissions
• No fixed expiry dates
• Cash settled
• DMA/online trading
• 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 tend to arise when traders use them to concentrate risk instead.

The main disadvantages of trading CFDs are:

• High-risk instruments
• No ownership or voting rights conferred
• May not rank equally for dividends or corporate actions
• Not economic for long-term positions
• Margin requirements + P&L swings can force traders out of positions prematurely
• Profits are subject to UK Capital Gains Tax
• Counterparty risk resides with the broker and not a clearing house or central counterparty

10. 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 find 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.