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Please remember that when you trade, your capital is at risk. More than 65% of retail investor accounts lose money when trading CFDs with most of the providers below. You should consider whether you can afford to take the high risk of losing your money before moving forward.
Contents:
A Contract for Difference, or CFD, is a financial contract that allows you to speculate on the movement of the price of an asset. It is a bet on whether an asset’s price will increase or decrease. A CFD is not an asset on its own, but you can purchase it based on a large number of other assets such as shares, ETFs, indices, forex, options, or even commodities like gold and oil.
A CFD is typically arranged between two parties. One side believes the price of the underlying asset will go up, and the other side believes that the price of the asset will go down.
If you believe the price is going to go up, you will buy (or go ‘long’). If another person believes the price will go down, they will sell (or go ‘short’).
Whoever gets the prediction right in this situation will make a profit based on the price when the original contract was created and the new market price.
A simple way to understand the concept is to think about a tennis match. Imagine a Wimbledon final between Roger Federer and Rafael Nadal. You and your friend decide to place a bet with each other on who will win the match and agree on a £10 wager.
This is effectively a contract based on the outcome of the match. Neither of you will win any of the Wimbledon prize money if you are correct. You have no ‘skin in the game’ in the underlying asset (the prize money), but you can still generate a profit if your prediction is correct.
A CFD is the same.
Another key component of CFD trading is leverage. Almost all CFD trading uses some leverage, which is another word for borrowing. It means that a percentage of the funds you are trading with is not your own money, but a form of debt.
Are CFDs risky? Yes, CFD trading can be very risky. You can make big returns if you get it right, but if you get it wrong, you can lose everything you invested.
CFD trading is the buying and selling of contracts for difference (CFDs). CFDs allow you to speculate on the price movements of assets like stocks, indices, forex and commodities without actually owning the underlying asset.
Each CFD is composed of two trades involving a buy (or long) position and a sell (or short) position. If the first trade opening the CFD is a buy (or long) position, the second trade which closes out the position will be the reverse trade or a sell (or short) position.
The net profit of the CFD trade is the price difference between the opening and closing positions (less any commissions or accrued interest).
If you choose to go long, you will need the current market price of the CFD to be higher than the buy price in order to make a profit. In the same way, if you were going short, you would need the current market price of the CFD to be lower than the sell price to make a profit.
The difference between the buy and sell price is called a spread, and it functions as a commission for the CFD broker. Some brokers will also charge a fee on top of the market spread.
The simplest way to explain how CFD trading works is to work through the two sides of the trade. Let’s use gold as an example. Say you believe that with all the economic uncertainty around and high rates of inflation, the price of gold will go up.
You could buy a Contract for Difference in a trade known as ‘going long’. If you are correct and the price goes up, your profit will be the difference between the current market price and the price when you purchased the CFD.
If you get this wrong and the price goes down, your loss will be the difference between the current market price and the price you purchased the CFD.
The other side of the trade is the same but reversed. If you believe that the price of gold is going to drop, you can sell (or ‘short’) an opening price. If gold drops, your opening price will be higher than the current one, and the difference is your profit.
If the price goes up, your opening price will be lower, and the difference will be your loss.
Leverage in CFD trading allows you to gain exposure to the financial markets with a smaller initial deposit, known as margin, than would have been required if you were to buy an asset directly.
Essentially, the amount of money you put into a CFD trade will not be the full amount of the trade but a percentage of the total position size.
CFD trading in the UK is quite similar to how we use a mortgage to buy a house. If you have £20,000 in cash, you can use this to purchase a property worth £200,000. Any gains or losses on the property are not based on your deposit but on the full £200,000 value.
The difference with CFDs is that the prices are much more volatile, which makes the leverage much riskier, and you may need to close out your position even if the value has dropped.
CFD providers offer different leverage amounts based on how risky the investment is. A CFD for the S&P 500 might only need a 5% deposit, but an individual stock like Apple might require a 20% deposit.
Say you decide to take a CFD position in Apple and have £5,000 to invest. That money will be used to open a position in Apple worth £25,000 because £5,000 is 20% of £25,000.
Now, if you are correct in your CFD bet, it means you will make a gain based on the entire £25,000. Say you take a long position, and Apple’s stock gains 10%. That means your profit is £2,500 (£25,000 x 10%), which actually represents a 50% return on your £5,000 investment.
That’s the power of leverage.
However, it goes both ways. If Apple stock instead goes down by 10%, that equates to a 50% loss on your initial investment. Additionally, if Apple stock goes down by 30%, that would mean your total position has dropped £7,500.
Now, in the UK, there are protections for investors, which means you cannot lose more than you have invested, but that still means you can lose everything you put into CFDs.
Leverage in CFD trading magnifies potential profits or losses as it is always calculated on the total size of your position and not just the margin.
Hedging is a risk management strategy used by short to medium-term traders and involves holding two or more positions simultaneously with the goal of offsetting any losses from one position with the gains from the other.
You can think of it like an insurance policy protecting your investments from downside risks. Hedging does not stop an unfortunate event from happening, but it can limit your losses if the event does occur.
Hedging can be used to reduce or limit downside risk in assets such as shares, ETFs, indices, commodities, forex, and even cash.
There are many ways to hedge risk in your investment portfolio, including making use of instruments such as CFDs, options, futures contracts, or spread bets. CFDs are typically considered the best for hedging because, unlike the other instruments, they do not have a contract expiration date. So they can be used to hedge assets that need longer-term protection.
Hedging with CFDs is particularly useful in bear markets where there is a continuous decline in asset prices (usually about a 20% drop from recent highs). Bear markets are typically caused by depressing economic fundamentals, investor fear, uncertainty, natural disasters, and pandemics such as COVID-19.
Hedging with CFDs means you can speculate on the price movements of financial markets without actually owning the underlying asset or paying the full value of the underlying asset upfront. This means traders can access capital to open large enough positions to offset losses from other trades.
While profits can be magnified in CFD trades, it is important to highlight that losses can also be magnified as all gains or losses are calculated on the total size of the position and not only on the margin initially deposited.
Hedging with CFDs also means that you do not pay stamp duty on your CFD positions since you do not take physical ownership of the underlying asset.
To hedge with CFDs, you need to open a position in an asset that will become profitable as one of your other positions starts to incur a loss.
Ideally, you want to take the opposite position to the market exposure you already have. This can be achieved in many ways, including focusing on a single stock or currency or even hedging an index to protect a diverse portfolio.
Here is an example of how to hedge a one-stock portfolio with CFDs:
Assume you have a long position of 1,000 Apple shares currently worth £100 per share. The total size of your portfolio is £100,000.
Say you carried out some research which revealed the following hypothetical sequence of events would happen within the next few days:
Based on this information, you conclude and predict that the price of Apple shares will fall by at least 10% within the next few days.
Since you hold £100,000 worth of Apple shares and you predict that this 10% decline is only temporary, you need to come up with a way to protect your portfolio to avoid a loss of £10,000 (10% of £100,000).
There are many ways to do this, including closing your portfolio and transferring the £100,000 to cash. The problem with this method, however, is that you might incur capital gains tax and also have to pay stamp duty and brokerage fees should you decide to reopen this position in the next few weeks.
A potentially tax-efficient and cheaper way to protect your portfolio is by hedging with CFDs.
To hedge this position with CFDs, you could short Apple shares in the short term throughout the duration of the decline you’ve predicted.
Let’s say you take a short position in Apple using CFDs at £100 per contract. If you choose to short 1,000 Apple shares (same as you have in your long position), the size of your short position would be £100,000. To open this position, you only need to deposit 20% (£20,000) of the total position size. This is called a margin. If you were investing in Apple shares directly, you would have had to pay the full £100,000 upfront.
If your prediction is correct and Apple shares fall 10%, your short CFD position will increase by 10% to £110,000, giving you a profit of £10,000 (before deducting any CFD trading fees).
Your long position with the real Apple shares will also be down £10,000 to £90,000. So, you can see that the CFD nets off the loss incurred in your real portfolio and you only used £20,000 to open it. That £20,000 is still yours, too. You only lose some (or all of it) if your prediction is wrong.
If you wanted to realise a profit from this trade instead of simply protecting your long position, all you had to do was increase the size of the margin deposited from £20,000 to the amount required to reach your desired profit.
Now, if your prediction had been wrong and Apple shares went up by 10%, you would have lost £10,000, bringing the total value of your short position down to £90,000. It might make sense to close out the position at this time to avoid further losses.
Your long position, on the other hand, would have increased by 10% to £110,000, giving you a profit of £10,000 (before accounting for the CFD fees) to net off the CFD loss.
Finally, If there were only a negligible impact on Apple’s share price, you would have gained and lost nothing in either position.
To trade CFDs in the UK, you’ll need to:
We’ve compiled a list of the best CFD brokers in the UK. These are our top five CFD platforms for trading a wide variety of instruments, including forex, indices, stocks, ETFs, commodities, options, and futures.
Please remember that when you trade, your capital is at risk. More than 65% of retail investor accounts lose money when trading CFDs with most of the providers below. You should consider whether you can afford to take the high risk of losing your money before moving forward.
The providers listed below are authorised and regulated by the UK’s financial watchdog, the Financial Conduct Authority (FCA).
Here are the best CFD brokers in the UK:
Pepperstone is a CFD and forex brokerage that allows you to trade a wide variety of instruments, including forex, indices, stocks, ETFs, commodities and other assets via contracts for difference (CFDs). The Pepperstone platform boasts low-cost spreads, fast execution speeds and access to over 1,200 trading instruments. The Pepperstone CFD trading accounts allow a minimum trading size of 0.01 lots and a maximum of 100 lots. Retail traders can access leverage of up to 30:1 and 60+ currency pairs. Professional traders can access much higher leverage and even more exclusive features.
Pepperstone also allows scalping, expert advisors, hedging, news trading and social trading. With Pepperstone, you can trade and enjoy the seamless creation of advanced trading strategies via some of the most popular and powerful trading software, including TradingView, MetaTrader 4 (MT4), MetaTrader 5 (MT5), CTrader, DupliTrade (for social and copy trading), and Capitalise AI (for code-free trading automation). The Pepperstone platform is suitable for both beginners and advanced traders. It is especially suitable for professional traders who want to take advantage of higher leverage. Pepperstone also has a suite of educational materials to help traders at every level.
It is entirely free to open an account with Pepperstone, and all registered users gain access to a free demo account, which you can use to practise CFD trading until you become confident. On Pepperstone, the spreads, which function as trading fees for CFD brokers, start at 0.6 pips for forex CFDs, 0.4 for index CFDs, 0.05 for commodity CFDs, and 0.10% per side for UK share CFDs. Pepperstone also charges a swap rate (overnight fee) for holding CFD positions overnight. Other fees apply. Pepperstone does not offer an ISA or SIPP.
Please note: When you trade, your capital is at risk. Between 74 and 89% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and can afford to take the high risk of losing your money.
Earn up to 4.75% annual interest on uninvested cash
XTB is an easy-to-use, fully customisable European trading platform and one of the largest stock exchange-listed CFD and forex trading brokerages in the world. XTB provides traders instant access to hundreds of global markets and over 5,800 instruments, including forex, indices, commodities, stocks, and ETFs. Customers can take advantage of tight spreads from 0.1 pips, 30:1 leverage and zero commission on stock and ETF CFDs.
With XTB, you can trade using the in-house trading software, xStation. xStation by XTB is a powerful trading software available on iOS, Android and desktop devices and suitable for both beginners and advanced traders. The xStation trading software gives you access to comprehensive charting and risk management tools. With the inbuilt trading calculator, you can easily estimate costs, profits or losses before opening a position, modify stop loss and take profit orders directly on the chart or close all positions with a click of a button. XTB also has an extensive library of educational materials, including videos, webinars and courses suitable for both beginners and experienced traders. When you sign up, you will have access to a dedicated account officer who will work with you to help you better understand your needs and how XTB works.
It is free to open a CFD trading account with XTB, and all users have access to a free demo account with £100,000 in virtual funds, which you can use to practise trading and investing until you become confident enough to use real money. Deposits in GBP and EUR are free of charge, but withdrawals below £60 have a £12 processing fee. Inactive accounts also attract a monthly fee of €10 (£9). On XTB, the spreads, which function as trading fees for CFD brokers, start at 0.1 pip for forex CFDs, 0.004 points for commodity CFDs, and 0.04 points for index CFDs. Trading stock and ETF CFDs are commission-free on XTB. However, overnight fees apply relative to the value of your positions. XTB has offices in over 13 countries, including the UK, Germany and France, and over 1 million customers worldwide. XTB does not offer an ISA or SIPP.
Please note: Contracts for Difference (CFDs) are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Earn up to 5.3% annual interest on uninvested cash
eToro is a multi-asset brokerage that allows you to trade and invest in over 3,000 instruments, including stocks, forex, ETFs, indices, and commodities. Users can trade the underlying assets directly or indirectly via contracts for difference (CFDs). CFD trading on eToro allows you to apply leverage to your trades, giving you greater exposure to the market with less capital.
As an eToro customer, you will have access to eToro’s impressive range of fundamental and technical analysis tools suitable for both beginners and expert traders. eToro gives you access to market news, economic data, social media and news sentiment trends and advanced charting tools. ProCharts, a professional-grade technical analysis tool available via eToro, enables you to compare charts from different financial instruments and time frames. The software also provides risk management tools, such as Stop Loss, Take Profit and Trailing Stop Loss, which you can use to better manage your positions and protect your investments. Stop Loss and Take Profit are not guaranteed. Additionally, the CopyTrader feature on eToro makes it possible for everyday traders to copy the trades or investments of top-performing traders on the eToro platform. Anyone can copy trades on eToro, and, in the same way, anyone can give others access to copy their trades. If you are an expert trader approved to participate in eToro’s Popular Investor Program, where others copy your trades, you will be eligible to receive monthly earnings.
It is entirely free to open an account with eToro, and all registered users receive a US$100,000 demo account for free, which you can use to practise trading until you become confident. On eToro, the spreads, which function as trading fees for CFD brokers, start at 1 pip for forex CFDs, 2 pips for commodity CFDs, 0.75 points for index CFDs and 0.15% for stock and ETF CFDs. eToro also charges overnight fees relative to the value of your positions. Withdrawals incur a fee of US$5 (£4), and FX rates apply to non-USD deposits and withdrawals. eToro does not offer an ISA or SIPP.
Please note: When you trade, your capital is at risk. 51% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Other fees apply. For more information, visit eToro.
CMC Markets is a CFD, forex, and spread betting platform that gives you access to over 12,000 instruments across a wide range of global financial markets, including forex, indices, commodities, shares, ETFs, and treasuries. The platform offers more forex pairs than any other broker listed here. It also offers an enhanced charting experience, allowing users to choose from more than 115 technical indicators and drawing tools, over 70 patterns, and 12 in-built chart types.
Experienced traders and beginners alike will find the platform useful, given its range of tools and resources, including a pattern recognition scanner, advanced order execution, and comprehensive news and analysis from Reuters. These tools are designed to offer quick execution, precise charting, and accurate insights. CMC Markets also offers a premium membership, CMC Alpha, delivering benefits like savings of up to 28% on spreads, a complimentary Financial Times subscription, and interest on uninvested cash. For active traders, a specialised account, offering spreads starting from 0.0 pips and fixed low commissions, is available.
Opening a live spread betting or CFD account with CMC Markets is completely free, and you can also access numerous tools such as charts, Reuters news, or Morningstar quantitative equity reports at no cost. All registered users receive a demo account with £10,000 of virtual funds, which can be used to practise trading until you are confident to trade with real money. With CMC Markets, the spreads, which function as trading fees for CFD brokers, start as low as 0.7 pips for forex CFDs, 1 point for stock and ETF CFDs (commission fees apply), 0.3 points for commodity CFDs and 0.5 for index CFDs. Holding costs (for trades held overnight, which is essentially a fee for the funds you borrow to cover the leveraged portion of the trade) also apply based on the value and duration of your trade. CMC Markets does not offer an ISA or SIPP.
Please note: Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Saxo, highly regarded for its in-house CFD trading software, is the UK division of Saxo Bank, a large European bank and investment platform that allows you to invest in over 71,000 financial products from stock markets around the world. With Saxo, you can trade over 9,000 CFDs on a variety of assets, including stocks, ETFs, indices, forex, bonds, commodities and index options.
Saxo traders also benefit from extensive charting with 50+ technical indicators, integrated trade signals, news feeds and risk-management features via the SaxoTraderGO platform, which is available on desktop, tablet or smartphone. Advanced traders can access even more sophisticated trading features on SaxoTraderPRO, Saxo’s desktop-only advanced trading platform.
With Saxo, the spreads, which function as trading fees for CFD brokers, start as low as 0.4 pips for forex, 0.10% for UK share and ETF CFDs, 0.05 points for commodity CFDs, and 0.25 points for index CFDs. Overnight interest rates and charges also apply based on the value and duration of your trade. Saxo’s suite of products includes a Trading Account, Stocks and Shares ISA and SIPP.
Please note: When you trade, your capital is at risk. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and can afford to take the high risk of losing your money.
Here are some advantages and disadvantages of CFD trading in the UK:
Here are some advantages of CFD trading:
Here are some disadvantages of CFD trading:
There are a number of different costs associated with trading CFDs in the UK. The specifics will depend on the CFD broker you choose, but here are some standard fees that most will charge:
Here are the best CFD brokers in the UK:
Yes, you can trade CFDs from a share dealing account if your broker allows you to. Many trading apps or platforms that offer share dealing will also offer trading in CFDs. However, these are often segregated for investors so as not to confuse the overall portfolio position.
With share trading, you are buying or selling the actual asset itself, i.e., the shares in the specific company. This can go up and down, but without leverage, the moves can be a bit less volatile. In contrast, with CFDs, you are not purchasing the underlying asset but instead making a bet on the movement of its price. Because of the use of leverage, you can make significant gains but also huge losses and potentially very quickly.
Yes, CFD trading is legal in the UK, throughout Europe, and much of the world. It is, however, not allowed in the United States.
Yes, CFD trading is taxable in the UK - any gains you make on your CFD trades will be subject to capital gains tax. One benefit of CFDs is that you do not pay stamp duty as you do on many other investment assets.
No, CFD trading is not recommended for beginner investors. CFD trading is risky and, generally speaking, should only be done by experienced traders who understand the potential risk of using high leverage in their portfolios.
You can start CFD trading with as little as £100. That said, different brokers will have different minimum amounts. Some will have no minimum at all. You should also be aware that commission amounts will often have a minimum fee. This can make trades very expensive on lower amounts.
CFD trading is not the same as gambling, but it has much in common with sports betting. Traders can use skill and knowledge to gain an edge and better predict the outcome, but many unpredictable factors can influence the results.
Between 60 and 80% of CFD traders lose money, and a significant factor in this is the use of leverage. Leverage magnifies losses and makes the risk of a margin call very high. This can mean traders need to exit their positions due to volatility, even if they end up being correct.
Here are the best platforms for CFD trading in the UK:
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