What is CFD trading? We talk to Ryan O’Doherty from CMC Markets to find out

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.

The transcript of the video interview on “what is CFD trading” is below:

So CMC Markets; you’ve been with them for many, many years now, as well as spread betting, CMC Markets is also a CFD broker. Do you want to briefly talk us through what CFDs are and how they can be used?

Yeah, well CFDs are more of a global product, so unlike sort of spread betting, where it’s isolated to the UK and Irish market, CFDs are available globally. So we have a number of clients in regional areas. Now CFDs is basically Contracts for Difference. It really is in the name. It’s a contract for the difference in price of an underlying security. Now that underlying security can be anything from indices, FX, commodities, treasuries, cryptocurrencies, etc. So it provides a way for clients, and a very popular way, to trade financial markets on a multi-asset basis, but it’s done on leverage. So clients only need to put in a small amount of their own capital to take out much larger positions. So margin starts from as little as, you know, about 3.33 for FX and moves up to five per cent for indices and ten per cent for commodities. So for clients that don’t have enough money necessarily to trade, you know, much bigger positions like a FTSE or US Stock with physical, or Futures, then you can actually trade them via a CFD product.

And obviously, CMC Markets is a London-based broker, but CFDs are a global product. So who would you say within the investment landscape CFDs are an appropriate product for, you know, of your client base? What does a sort of typical trader look like?

A typical trader. I mean with CFD trading, it’s a lot of traders that have come from, you know, other areas that they’ve traded previously, or they’ve done physical trading and then coming into CFD trading. It’s a very familiar way to get into CFD trading or trading short term, because you’re trading a number of units, so it feels familiar, unlike spread betting, where it’s pounds per point, which is a little bit alien to some people. The trading units is a much easier concept for clients to get to deal with.

Sure. So if you want exposure to 10,000 shared with Vodafone, you buy 10,000…

Buy 10,000, exactly. Where with spread betting, you doing £10 a point, which is a little bit confusing for traders that have done that in the past. And because, yeah, it’s a leverage product, it enables you to buy or profit from a rising as well as a falling market. So there’s a lot of clients that want to take advantage of that. Volatility of the markets is always there and, you know, opportunity presents itself, so being able to profit from both rising and falling markets is a very important tool, and that’s what CFD provides.

And in terms of what your customer base trade, what would you say were the most popular assets or instruments that your client base will trade on CFDs?

Yeah, CFDs very much, it’s equities to start with, but then indices and FX are probably the two major products that clients trade. The DAX and the UK100 and the US30 are very popular products. They give a diversified way for clients to get access to the market. So for a lot of people, they don’t necessarily know which individual stock is going to go up or down, but they have a general feel as to where the market’s heading. They read the newspapers or they get a general feel that the economy’s doing well or badly, and then they’ll say well, you know, this is a great way to get exposure without having to understand the complexity of the individual product.

And of course, it’s a sort of risk management tool as well, because if in fact you don’t know where the market’s going to go, you can run a long-short portfolio on equities as well, can’t you?

Absolutely. The hedging capabilities of these types of products is great as well because you can profit from a falling market as well as a rising market. You might hold equities, for example, in share portfolio and you feel that the market might have a bit of a pullback. Well you can go in and you can actually short the CFD on the market generally, and so you can sort of hedge that position and sort of wait for the market to fall, and then, you know, get rid of your short position on the CFD and then continue on with your equity position.

Yeah, it’s a good risk management tool. We always used to do that at Investors Intelligence, when we’d run our long-short portfolios, you know. If your long’s fairly weighty, FTSE100 stocks, you know, you always run the risk that those stocks will be pulled down with the general market, so you can use an index CFD…

Yeah, especially if you don’t want to sell them at that point, you don’t want to realise the profit or a loss on those particular positions, then, you know, using a tool like CFD to hedge is a great…

And it’s a quite a nice way to pick individual stocks you think may outperform the market or underperform the market, whilst being sort of fairly agnostic to the overall moves.

Shall we just quickly have a look at your CMC CFD trading platform and you can talk us through the assets that are available on it?

Yeah, certainly. I mean you know, this is a basic CFD trading screen, so it’s customisable so you can set it up the way you like, but what I’ve got there on the top left-hand area of the screen is just some quote panels, some of the major markets, so the US30, DAX and Nasdaq up there on the top, and then down the bottom, you’ve got sort of crude oil, copper, silver, and then some currency pairs like euro, dollar and cable down the bottom. So that gives me easy access to what the prices are. I simply click one of those and the order ticket will load and you can instantly place a market order quite quickly.

Sure. And that’s your bid offer spread, isn’t it? So they’re your prices, rather than the underlying market?

That’s correct, yes. And we’re very transparent regards to the cost, so you’ve got the spread actually in the bottom of that quote panel, so you can constantly see what the spread is, depending on the liquidity of the market. Some of those are fixed, so during market hours, for example, the indices spreads are fixed, but clients can actually see what those spreads are, quite visible on the platform.

And then on the right-hand side, you’ve got the charts. Obviously, for a lot of experienced traders, they like all their analysis and looking at chart performance. They’ve got the different indicators, but also for new clients, they quite like just being able to see charts, see what the general price has been doing over a period of time, and then they start using more of the tools later on as they become more experienced.

And then on the mobile side of things, because these are really important these days, you know, roughly 60 per cent of our trade volume is done on mobile. I’ve been in this industry for, you know, 14/15 years, and it’s really been the last four or five years we’ve started to see the balance tip towards mobile trading.

I’ve always found the shift to mobile trading fascinating actually, because I can’t make a decision on a mobile phone. I can close a decision on a mobile phone, but…

Yeah. Well, we do see a lot of that. So you see a lot of people monitoring their [open] positions on mobile. They’re out and about; they want to see whether or not the profit or loss is on there. But it’s having access to it wherever you are and then being able to close it out. But also, with sort of push notifications and being able to get information sent to you so quickly, you might be out and about so you don’t want to miss out on an opportunity. So you can easily go on to the mobile platform, place a trade. It’s the exact same order ticket, looks exactly the same, it feels the same, and you just execute on the go, which is quite a powerful tool. But yeah, probably about three or four years ago, it tipped, and we do more trade volume on mobile than any, yeah.

Interesting. Okay, so in terms of CFD trading, let’s just go through the pros and the cons. What’s good about CFD trading and what’s bad? You know, what do clients have to be mindful of?

Yeah, so I mean obviously when trading on margin, there’s a risk involved. There’s sort of a double-edged sword in some ways. You only have to put a small amount of your own capital in to take out a much larger position. So your exposure is on that net overall position, and so you can amplify your profits quite quickly, but you can also amplify your losses. So it’s really important that clients put risk management orders on their trades, because some of that volatility might happen while you’re away from your screen, and so you can lose money quite quickly. And with the new regulations that have come in, you can’t lose more than your initial capital in your account. So you’re protected in that.

That’s for retail customers, not for customers that upgrade to professional…

Yeah, so there are restrictions, depending on what type of client you are – retail or professional. But if you’ve got more money in your account, you can still lose more on that particular position than you put in. So it’s mindful to put the stop losses in, put some risk management on. So that’s one of the risks. One of the differences between CFD and spread bet trading as well is that CFD trading of trading in the underlying currencies. So depending on where you’re trading, so if you’re trading in the US market, for example, you’re trading in US dollars, so you have a currency conversion risk, I guess, in some ways. So once you close out that position and you return it back into pounds, then there is that transfer. And if the pound had gone down or up in value then that’s obviously going to affect your profit and loss.

And currency exposure in particular is something that people don’t understand or bury their head in the sand and refuse to…

Well I think that’s probably the way to think. I think they probably know it’s there in some ways, but if you’re trading spread bet, you don’t have that. It’s always pounds, so you don’t have to worry about that. But on CFD trading, you do, and you’ve got to be mindful of it. So it’s a bit like going on holidays. You’re always constantly looking at what the exchange rate is for holidays. You should be doing the same on…

So what happens with currency balances for CMC, for example? So for example, if I’m trading the FTSE, it’s not an issue because sterling’s a [nominated] product, but if I’m trading the DOW, for example, and you know, I have an amount of profit or loss, what happens to that? Does it sit in dollars?

No, it’ll automatically convert into pounds once you close the position at the prevailing sort of spot rate. Plus, one thing when you’re transferring across, then there’ll be the spot rate plus a small percentage on top of that.

So there’s no danger of running a deficit in one currency and incurring interest?


And say for example I’m a customer who, you know, a lot of customers have their favourite products, you know, some people like to trade the DAX, some people like to trade US equities; could I have a US nominated subaccount for trading, or am I always going to be subjected to…

There are some accounts that potentially can be set up. So if you would rather trade in US dollars, for example, there are accounts out there that allow you to do that. So you’ve got the option. So more advanced traders that want that sort of capability, then they can offer that.

Okay, super. And let’s just take a quick look; over the time you’ve been at CMC Markets, traders that don’t make money, it’s a sort of well-publicised thing. What would you say are the top three mistakes they make, and what can they do to…?

To avoid them, yeah. I mean I used to run a whole range of education courses, based on trading and trying to learn the psychology and the risk management of side of things.

This is for CMC?

Yeah, for CMC Markets. And you know, one of the areas that’s the biggest is that clients feel like it’s a great opportunity to make a big amount of money quite quickly.

Yeah, especially with Instagram…

Yeah, absolutely. You know, there’s a whole range of people trying to promote that you’ll make a million dollars within a day or something; those sorts of claims. But it’s really important that clients do their research. You know, understand the markets that they’re going to trade, because different events affect different markets. So you know, fundamental news such as non-fund payrolls or CPI figures coming out will really affect, let’s say, the FX market. Unless you know that those events do, then you won’t realise why the price has gone up or down in value. And so that can affect your trade. So it’s really important to understand what moves particular markets. So doing that research.

The second is really just about having a strategy. So making sure that you say, well, how much money am I willing to risk. Make sure that you say, okay, that’s the limit, and then put your stop losses on the trade so that when the markets move, it will automatically execute a trade to get you out of that position. And you can use multiple different types of stop losses. You can use regular stop losses, which are there at a particular level. But if there is a market gap, so the market trades at this level and then gaps below, you’ll get executed low on. So you’ve got another tool called guaranteed stop loss orders, which’ll then guarantee the price, and you pay a small premium for that.

Do you have trailing stops as well?

We do, yeah.

So if the market’s moving up in your favour…

It’s a good tool. I mean trailing stops are one of those tools that, yeah, as the market moves in your favour, the stop loss will move up in a certain point range, which you specify. And they’re great once you’re actually in profit. I prefer to place them once you’re in profit, because sometimes, the market can move up quite quickly and then back down quite quickly, and you know, you haven’t really gone through your whole strategy by that stage. So I generally would place a regular stop loss to start with. Once my position’s in profit, I will then put a trailing stop loss behind it and then…

It’s actually one of the sort of fundamental rules of trading and investing is, you know, you only have to read anything from any experience, trading or investors, and there’s a brilliant book actually called The Art of Execution. Have you read that?

Yeah. I haven’t read all of it but I’ve read some of the… It’s fascinating, yeah.

It’s brilliant. And you can literally boil trading strategy down to run your whims, cut your losses.

I mean risk to reward is one of those features where you say you’re willing to risk £50 to make £50. Doesn’t make a lot of sense to me because, you know, there’s trading costs and all those sorts of things involved. So you’re looking at a risk to reward strategy of at least 1.5 to 2, so risk 50 to make, let’s say, 100, and then over time, you only have to get, let’s say, you know, one of every three trades right to actually start breaking even. If you’re more successful than that then you’ll start making a profit.

Sure. Don’t be greedy.

Yeah. But it’s a really good point about the books. I think, you know, one of the things is there’s so much literature out there these days. You know, a lot of providers provide it on their websites to a certain degree. But there’s some great books. You know, clients should really have a look.

And I think the chap who wrote that book was one of the biggest fund managers in the UK, I think the world, so he knows what he’s talking about.

You would hope so.

He’s not just some guy off the street. So that was two, wasn’t it, and third, what’s your sort of third mistake?

The third one is just not to overtrade. You kind of get bored sometimes, especially with trading; it’s got that element of excitement, where investment, you don’t mind holding off and letting those positions run. But on trading, you’re constantly looking for opportunity. You’re looking at trades. And sometimes, you’ll get into a trade based on purely because, you know, you think oh well, I just want to be in something. So don’t overtrade. Always be mindful of getting in on a particular reason, having a strategy for getting into the trade.

Exactly, Yeah, no, sometimes best trade’s to be in cash really, isn’t it?


Absolutely. Yeah. Well right, thank you very much.

No problems. A pleasure.

Thank you very much for joining us for this episode of Good Money Guide TV. We’ll be back with something else to talk about shortly.

Thank you.

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Trading Risk Warning

ALL INVESTING INVOLVES RISK. Investing, Derivatives, Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.
ESMA & FCA Risk Warning – “CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 68-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Capital at risk”