Best CFD Brokers

How do you trade CFDs?

When you trade CFDs you do it in much the same way as trading shares. In that if you want buy 10,000 shares in a company you would instead go long 10,000 CFD.

It is essentially the same as buying 10,000 shares, but when you trade a CFD you speculate on the rise or fall of the price of the underlying instrument that the contract is over, without ever owning it, meaning that your interest in that instrument is purely economic.

CFDs or Contracts for Differences are cash-settled, and there is no delivery of shares or commodities, or whatever else the CFD is over.

Unlike futures contracts CFDs have no fixed expiry dates and in theory, a CFD can run on forever.

Though daily financing charges are applied on CFD trades that are held open beyond a business day, and they may make very long term CFD positions uneconomic.

An example of CFD trading explained

Let’s imagine we want to take a long (buy) position in Vodafone shares, but rather than buying the stock we choose to buy a CFD over them, and we have £5000.00 available to us for the trade.

Assuming that Vodafone shares are trading at 100p we could have invested £5000.00 into the stock to buy 5000 shares.

But using as CFD, which on leading equities typically offer leverage at a ratio of 5:1 we only need to commit £1000.00 to the trade to control a CFD over 5,000 Vodafone shares.

On that basis then might choose to take on a larger position, by using a deposit of £2000.00 to create a CFD over 10,000 Vodafone shares.

So, imagine that we have placed the CFD trade in the morning and that just before Wall Street opens Vodafone’s share price has risen to 110p per share – compared to our 100p entry price.

We now have running profit on our position of +10p per share – true for both the physical stock and the CFD trade.

However, because we have taken a larger position in Vodafone, using a CFD we have a larger running profit.

How to calculate running profit on CFD trades

In this case, that’s calculated as follows:

10,000 (the number of shares in our CFD) * 10p the running profit per share) = £1000.00.

Let’s imagine that the price of Vodafone continues to appreciate throughout the afternoon and that by 4.15 pm the stock is trading at 115p per share.

The running profit on the CFD position has now reached 15p per share and we cash in by selling our CFD position to close realising a gross profit of £1500.00

10,000 *15p = £1500.00

Our outlay on the CFD trade was £2000.00 initial deposit plus a commission or trading charge, and we have made a £1500.00 gross profit.

A figure that represents 75% of our initial deposit on the trade.

When we compare that to the profit we could have made investing £5000.00 into Vodafone shares, which is £750.00 or 15% of the initial outlay of £5000.00. We can immediately see how the gearing or leverage within a CFD can work in our favour.

What are the advantages of CFD trading over other forms of trading?

CFDs are among the most flexible of financial trading products and they can be tailored to fit all shapes and sizes of trades.

Here’s a summary of some of the features of CFD trading compared to both Exchange Traded Futures and Financial Spread Betting.

One of the best things about CFDs is that they are not deliverable and instead are settled for cash. That means that traders can go long or short using CFDs with equal ease, as they never have to take or make delivery of the instruments that the contract is over. As such CFDs can be used to profit in markets that are falling or to hedge physical positions against a downturn in the markets.

There are no absolute minimums in terms of cash required to open a CFD account but realistically you will probably need to have an initial deposit of at least £2000.00 for it to make economic sense. And ideally a figure closer to £5000.00 is preferable. Smaller sums limit the scale and number of positions you can take and CFD traders with small deposits can face higher marginal costs in terms of minimum ticket charges etc.

Short-term trading tends to be driven by sentiment which these days is often categorised as being either risk on or risk off. So it’s important for traders to be able to identify times when the market and fellow traders are feeling fearful and other times when they are feeling greedy.

Many CFD traders play the swings in market sentiment by jumping on to the trends they create, where weight of money and influence push the market in one particular direction.

More experienced traders will sometimes take a contra position for example getting long risk assets such as equities, when the market is in a risk off mood. This is often referred to as buying the dip. However deep pockets and good timing are essential for that strategy to work well.

One way for CFD traders to identify trends and trend changes in the market and the instruments they trade, is through the use of Technical Analysis which is the study of price action and volume.

The study of price action can reveal a great deal about market and trader sentiment and the price points at which bullish or bearish sentiment is triggered or fades away. That in turn can provide a framework around which traders can build their CFD trading strategy.

To learn more about technical analysis see our dedicated TA section.

What are the disadvantages of CFD trading

The main disadvantage of CFD trading is leveraged losses on CFD trades. That leverage can work against us just as easily and had Vodafone shares fallen by -15p across the trading day, then that CFD position would have created a running loss of -£1500.00.

We would either have had to close the position and realise the loss, or place further variation margin, equivalent to the running loss, on our account, in this case, £1500.00 in order to keep the position open if we wished to hang on to trade.

You also do not own the underlying asset, so unless our broker allows it you will not be able to vote on corporate actions or attend AGMs. This also means that there is added risk of default. When you own physical shares you are the ultimate owner so if you broker goes bust you still own the shares. However, with CFDs, the counterparty is the broker, so if they go bust you may lose the position.

What are the major costs involved when trading CFDs?

CFD trading platforms make money in two principal ways firstly if they act as agents they earn a commission on each trade their clients make and an income from the overnight funding charges they levey.

However they may also act as principal in which case they make prices to their clients and capture the spread between those prices, they oppose their clients trading taking an equal and opposite position. Under this model the firm will profit if the client loses and lose will if the clients profit.

In an age of computerised trading firms often operate a hybrid model under which certain trades and clients receive an agency execution service, whilst others are “B”- booked i.e. the firm takes on the clients trade on its B or principal book. Those B book positions may be hedged from time to time based on internal market exposure rules.

Note though that in CFD trading whether your trade execution is under agency or B-book arrangement your trade counterparty is always your CFD trading platform or provider.

If you are trading CFDs or spread betting on stocks here are six hidden costs and dangers that you probably haven’t though about.

Trading OTC or “over the counter” products such as CFDs & spread betting will always be dangerous and especially risky if you are dealing on margin, where you can lose more than your initial deposit.

You should be aware of that fact as pretty much every financial promotion, website, account form and contract note will have a risk warning on it somewhere.

Although according to the FCA’s insight website we may all be suffering risk warning fatigue.

So, other than making or losing huge sums (relative to your initial margin) what other dangers lurk in the shark “invested” waters of ultra high-risk CFD trading?

Here’s a list of things to watch out for when trading CFDs.

CFD trading commission or spread widening

There are generally two types of execution charges for trading CFDs. Either commission with clean prices, or no commission with a widened spread.

If you get charged commission it means you buy or sell at the actual bid/offer or inside if you are using a DMA (Direct Market Access) broker.

If you are being charged a spread then you won’t get charged a commission, but you will be buying or selling at a price slightly wider than the bid/offer. So for example, if a stock is trading 101/102 your price maybe 100.9/102.1.

The spread is usually widened inline with what the commission would be. In this case 10 basis points or 0.1%You will agree to a commission rate when you open an account phrased either as “basis points” or as a percentage.

If you are spread betting you may find a broker who can offer you DMA on some smaller stocks by getting them to work an offer in the underlying market. But generally, you will be charged a widened spread.

If you are charged 0.1% commission that’s £100 on a £100,000 trade or 10 basis points.  They are the same, just different terminology.

Normally, most brokers are quite clear about this, but it is worth checking you are not being charged double.  If you have a high commission and don’t get market prices, it may be time to change your broker.
For larger traders paying commission and trading, DMA means you can trade inside the best bid/offer. The ability to get within the spread can often compensation for paying commission on wider prices.

CFD interest on overnight positions.

Just like when you borrow money from the bank, when you are trading a CFD you are borrowing to do so, and there is an interest rate attached.

A long time ago, when I opened my first CFD account I vividly remember the salesman saying, “well you get charged around 2.5% over/under base, but you shouldn’t really factor that into your trading”.

Hmmm, not LIBOR base, the firm’s base, which depending on the currency can currently be above 3%.

So that’s 3%+2.5% or 5.5% on your positions size (depending on the first it will either be the initial position size of the daily, you need to check).

So if you buy £100k of stock and hold it for a year that’s £5,500 in interest charges.

As with everything else in trading these rates are negotiable if your account is large enough.

You can read more on overnight financing charges here.

FX currency deficits on CFD trading P&L

Most CFD trading platforms will have your account in one currency and do automatic currency conversions into that currency when you have a different currency P&L.

But your broker may have a treasury cost to running a book in multiple currencies and will charge accordingly.

So, if you put £100k on your account and trade GBP stocks, but then buy $100k of US stock on 10% margin.  You have a GBP but no USD.  So you are essentially running a USD overdraft to fund the USD position.  You may not have a margin call, because your GBP nets off the USD.

But as your broker has bought the USD stock to write a CFD around, they have still had to lodge USD with the exchange for the purchase, and will, therefore, pass the costs of this on to you.

Some institutional or professional brokers are reluctant to do automatic FX conversions for clients trading in different currencies, as some like the currency exposure.

Plus a currency can move 10%, so your broker would be susceptible to client complaints if the 10% move was in their favour.

If you are trading on markets around the world, make sure that you regularly check your currency exposure and instigate conversions where necessary.

What are the best CFD trading strategies?

CFD trading platforms offer the facility for you to trade the financial markets, but only you can implement a winning strategy to make money trading.

If you are looking for a CFD trading strategy, these three golden rules are a good place to start.

1) Run your wins, cut your losses

This requires discipline and one of the main reasons that people lose money trading is because they are too eager to lock in a profit.  trading CFDs is a numbers game and the best hedge fund managers in the world only get it right about half the time.  That means that half of the trades they execute a loss. The market is based on trend and reversion so technical analysis plays a high part in short and long-term CFD trading.  If you call a trend-right you are going to make money if you leave the trade open, if it a loser cut it straight away.  You can do this by using a stop loss or a trailing stop loss.

2) Don’t overtrade

If you only have £10,000 to play with you definitely don’t want to put all that into one trade.  Sure if it’s a winner great but if it’s a slow mover or a loss then you are stuck and won’t be able to enter into any new positions when potentially profitable opportunities come up. Plus, if there is a shock short-term overall market then you’ll get a margin call and be forced to close your positions because you can’t cover the variation margin.  Being forced to close a position is one of the worst things that can happen to your trading strategy.

3) Diversify your positions

One of the great things that CFD brokers provide the facility for is making money when the market goes down.  This means that you can have a wide range of positions but actually remain fairly market neutral.  For example, if you are short some individual stocks because you think they are badly managed then you are exposed to an upwards move in the markets.  So you can hedge using a CFD position in the underlying index to protect against this.  You could also have some long positions in similar sector stocks as some protection.

The key thing to remember is that profitable CFD traders don’t open massive single positions and hope for the best.

If you want CFD trading tips, most financial media produce daily buy and sell recommendations which are often a good source of stimulus.

One thing to remember though is that stock tips in the papers are usually based on fundamental analysis with a longer-term view as opposed to CFD trading which usually employs market timing and technical analysis as this is more relevant for short-term price moves in liquid stocks.

Here are our top providers for CFD trading ideas and tips

• An FCA-regulated CFD trading platform – most CFD brokers can provide analysis and trading signals. City Index for example has an excellent trading signal section called SMART Signals.
• Investors Intelligence – since 1942 they have provided daily long/short trading ideas and model portfolios
• Stockopedia – set up screens and get trading ideas from fund manager strategies
• Trading Central – trading signals based on technical analysis
• Autochartist– trading signals based on technical analysis
• Stockomendation – aggregates stock recommendations
• FuturesTechs – subscription service for professional and semi-professional traders
• Good Money Guide – our daily updated trading signals feed displays potential buy and sell targets for UK stocks

These services act independently from CFD trading platforms and are in some cases regulated by the FCA .They often highlight trading signals and CFD trading buy and sell signals, but it is up to the trader to decide if they are any good and worth of a trade.

You can also get a form of CFD trading tips from the social trading brokers, where you can follow traders and copy their trades. But, picking a trader to follow is just as hard as picking a winning stock. If you look at the people that make money on social trading platforms a lot of them mirror the portfolios of top global growth funds or have just had a bit of luck.
Where to trade CFDs?

Most established CFD trading platforms have one or more of these services integrated into their CFD trading platform or provide it through a subsidised or separate subscription if asked. If you are looking for a CFD broker you can view our CFD account comparison tables, read our guide on how to compare CFD trading platforms or find out what to avoid when choosing a CFD platform.