Contract for Difference (CFD) trading has become increasingly popular over the last few decades. Many retail brokers are beginning to offer CFDs to their clients as the demand grows. CFD trading appeals to many traders, as they can make a profit on both the gains and losses of the underlying instrument. But there are a few key factors to take into consideration before you start to trade CFDs.
In this article, we’ll take a look at what traders should be on the lookout for. We’ll also run through what we think are the best trading platforms for CFDs. Make sure you understand how any trading platform works in depth before committing your money to it.
If you are looking for more in depth guides on the brokers offering CFDs, make sure you read our:
Best CFD Brokers 2022
We looked at some of the highest regarded CFD brokers available to make this list. When comparing brokers, we examine aspects such as the fees and commission on trades, customer service, ease of use, and other important factors.
This is our selection of the best CFD trading platform…
- IQ Option
- Interactive Brokers
- FP Markets
Plus500 began operations in Israel in 2008. They have added offices to many other regions which make them one of the most regulated brokers around.
This platform works best for traders looking to trade CFD, as they don’t offer other forms of trading.
Their minimum deposit is $100, but they more than make up for it with their low fees and spreads on trades. As a bonus, there’s no deposit or withdrawal fees from your account.
|User friendly platform||Platform could use more research tools|
|Responsive customer support||Only CFDs|
|Accounts are easy to open and monitor|
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% 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.
eToro is one of the most popular retail trading platforms. They provide brokerage to millions of users and facilitate thousands of transactions every hour. Their customer service is widely regarded to be some of the best in the business.
They are regulated by trusted authorities all over the world, so you can rest assured that everything is above board.
eToro uses advanced risk management features like customizable stop losses and real-time alerts to mitigate the volatile nature of CFDs.
|Large variety of trading instruments, including cryptocurrencies||Accounts allow one base currency|
|In-depth financial reports|
|Free demo account allows up to $100,000 in virtual currency|
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% 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. eToro USA LLC does not offer CFDs, only real Crypto
3. IQ Option
IQ Option is based in Cyprus and is regulated by the authority CySEC. They launched in 2013 and have built a reputation as one of the best. Opening an account with IQ Option is simple. The minimum deposit amount is relatively low which is attractive to new traders. Traders can choose between multiple account types to suit their needs.
They offer a free demo-account.
|Lots of instruments for CFD||Customer service responses sometimes slow|
|Mobile app is great|
|Transactions into trading your account are quick|
AvaTrade is a popular choice, based in Dublin, Ireland in 2006. Their regulations are set by the Central Bank of Ireland. AvaTrade is highly regarded in terms of financial security. AvaTrade uses the MT4 and MT5 trading platforms and comes with all the functions of those platforms. They have a proprietary trading platform, AvaOptions, which is focused on CFDs.
The platform is well designed and information is presented clearly. However, it only uses single-step login, which is prone to cyber-attacks.
|Lots of trading instruments available||Demo account is only available for 21 days|
|Accounts are quick and easy to open||Inactive accounts are heavily penalized|
|AvaTrade’s research tools are top notch|
XM is a group of online retail brokers regulated by CySEC. They have won multiple awards for outstanding service. The XM platform encourages sociability between traders to swap and discuss trading strategies. There is a large community of users, over 1.5 million.
XM is most impressive when examining its variety of research tools and educational material. There are useful webinars and lessons for all traders ranging from novice to seasoned veteran.
|Social platform allows for copy-trading||Various account types do not feel distinguished from one another|
|Compiles and publishes research and market analysis||Customer support available Monday to Friday|
|$100,000 demo account|
XTB is a globally-based online CFD and Forex broker with offices in Warsaw and London. As such, they are regulated by Britain’s FCA.
XTB has a long track record of reliability and publishes its financial statements regularly. Their fee and commission structure is competitive with any other retail broker. They are also one of the few who offer $0 minimum deposits to open accounts. This means you can start trading with the change you find hidden in your car seats.
|Free withdrawals over $10||High inactivity fees|
|Made for CFD and Forex trading||Commission for CFD on stocks is high|
|Excellent educational tools|
7. Interactive Brokers
Interactive Brokers is one of the oldest firms on this list, being in operation since the 70s. They started off in the UK being regulated by the FCA but have since added offices in the US and gaining SEC regulation.
They are considered highly reliable, especially for day-traders. Although there is no minimum deposit fee, they are not recommended for less-experienced traders.
The trading platform provides lots of information, but it could be divided up better. As it is, users are presented with too much information at once which could become overwhelming for some.
|Loads of useful research tools||Complicated trading platform|
|No minimum deposit||Opening an account takes a few days|
|Low margin rates|
Markets.com is a publicly listed brokerage firm regulated in five different jurisdictions. The broker uses their own trading platform – MarketsX. It’s well designed and easy to use with integrated research tools.
Aside from its MarketsX offering, traders also have access to the popular MT4 and MT5 platforms. However, these platforms have fewer trading instruments than MarketsX and are also more costly.
|Web trader is easy to use||Spreads are higher than competitors|
|Over 2000 CFDs available||Integrated research tools could be expanded|
|Trustworthy and regulated|
IG is another old name in the trading world. It is regulated by many authorities across the world such as the FCA in the UK and Germany’s BaFin. Today, IG is one of the largest CFD brokers in the world.
IG doesn’t use the MetaTrader platform. Instead, they built their own. The proprietary platform is highly customizable and quick to learn. There are lots of in-depth reports that IG provides for all its users.
|Exclusive trading platform||Fees on stock and Forex CFDs|
|One of the oldest retail brokers||Account opening is slow|
|They publicly disclose their financial statements|
10. FP Markets
FP Markets is an Australian CFD and ForEx broker regulated by the ASIC.
The brokerage supports 10 base currencies for accounts. Accounts can be opened easily with a relatively small minimum deposit.
FP Markets excels in terms of its fee and pricing structure. They are one of the few brokers who don’t charge inactivity fees for dormant accounts. In addition, they charge no withdrawal fees.
|Free demo account||They offer a limited number of markets and products|
|Regulated||The trading platform leaves a lot to be desired|
PepperStone is regulated by the ASIC in Australia and the FCA in the UK.
Traders outside of the EU can leverage their positions up to 500:1. This is useful to increase the size of position you can take, but could result in massive losses.
Traders have a wide variety of accounts to choose from, including ECN and STP. If you want a Sharia-friendly investment account, they’re available on request.
|Low inactivity fees||Platform needs more research tools|
|Free deposits and withdrawals||High commission on trading with CFDs|
|Advanced risk protection and stop losses|
What is CFD Trading?
CFDs were first traded on the London Stock Exchange in the early 1990s. CFDs were originally utilized by hedge funds and asset managers. The rise of retail trading has brought access to CFDs to casual traders.
CFDs are traded based on the performance of an underlying instrument. It is an agreement between a trader and their broker that concludes after a predetermined length of time. CFDs are speculative in nature. Traders try to predict whether an instrument price will go up or down. If they believe it will gain value, they “go long”, if not, “go short.”
Regulation surrounding CFDs has been slow to adapt to the growing markets. Some regions, such as the US, Brazil, and Hong Kong, have banned CFD trading outright.
Margin is the initial capital that traders invest to secure their position on CFDs. Depending on the leverage ratio, marginal capital is increased proportionally to secure a larger position than the initial amount would have allowed.
If a trader speculated the movement of the CFD incorrectly, they may lose more than the marginal investment.
The leverage that a trader has access to shows the amount that a broker will increase the initial investment size. This allows traders to take larger positions than they otherwise could.
Leverage is a ratio of the increased volume against the initial investment, for example, 100:1. In other words, an initial investment of $100 can be increased to take a position at $10,000.
Maximum leverage ratios are set by local regulations. Some regions, like the EU, are more strict and limit leverage ratios to 30:1.
Benefits and Drawbacks of CFDs
CFDs are a complicated and volatile market. While it is possible to make large profits using CFDs, it is also equally common that traders make losses. We’ve put together a brief list of the pros and cons of CFD trading.
If you’re looking for more information, skip to the end of this article where we’ve put together an FAQ as well as other important information on the subject.
- Using leverage can lead to massive profits from a relatively small capital.
- It’s possible to make money from both positive and negative performance of the underlying stock.
- Commission on CFD tends to be lower than traditional trading vehicles.
- Brokerages charge overnight fees for any contracts that run over a trading day.
- Using leverage for CFD increases the potential loss traders may face.
- Traders do not own the underlying instrument.
How to Pick the Best?
Depending on which country it operates in, it will be subject to different types of regulation. Traders must understand the ins-and-outs of these regulations.
Different regulatory zones may have rules determining maximum leverage amounts. In the UK, EU, and Australia leverage ratios can go as high as 100:1. Elsewhere, leverage maximums are not set.
Regulations will also determine what you’re allowed to trade and whether your funds are kept in segregated accounts.
Fees & Commissions
There are many ways that brokers charge their clients in order to earn money.
Some, like eToro, don’t charge traders a lot in commission. Instead, they take a cut of each trade when a position is opened or closed. Others make money by charging monthly subscription fees.
Traders who leave their accounts for months without actively trading may be charged inactivity fees. They use these fees to encourage users to remain active.
Platforms like FP Markets that don’t charge any inactivity fees are rare.
Depending on the trading platform, you will have access to a different range of securities. Because trading is done based on the performance of the underlying security or instrument, the more traders have access to, the more versatile you can be in your strategy.
Brokers like IQ Option and eToro have a wide range of securities on which to trade.
Most retail brokers offer different account types to their traders. These accounts differ in terms of their spreads and commissions. With some, higher tiers of accounts have access to more research tools.
When picking a trading platform, try to find one that allows a demo account. This list only includes the ones that give access to demo accounts. For most casual traders, standard accounts will suffice their needs. These accounts are typically limited to any account opened with less than a $100,000 deposit, but it changes depending on the platform.
Trading Platforms Available
Many use third-party trading platforms to execute trades. The most popular of these platforms are MetaTrader 4 and 5 (MT4/MT5).
The trading platform that you use will change the instruments you can trade on. Your choice of platform will also affect how much you are charged for each trade.
Some, such as IG and Markets.com have proprietary trading platforms. This means that they have set up their own platform through which all trades are executed. A broker that uses its own platform tends to have lower slippage and a higher degree of accuracy. Smaller platforms may have access to fewer security options.
Many traders worry about the level of customer support. This is an understandable concern. Brokers are responsible for keeping you and your money safe, so you want to make sure that you can contact them in the event of a crisis.
Many can only be reached via telephone on weekdays during office hours. Fortunately, many of them can be contacted 24/7 through email or e-chat.
AvaTrade won numerous awards for excelling in customer care.
Example of a CFD Trade
If you think CFD trading is for you, but you’re still unsure of its mechanisms, we’ve put together an example to illustrate how it works. Unlike other forms of trading where traders own the instrument they are trading, CFDs are contracts to buy or sell based on the speculated increase or decrease of the underlying security.
For example, a trader speculates that Microsoft stock will increase over a 30-day period. They decide to buy 200 contracts at $250 per stock. This trader does not have the $50,000 necessary to secure their position, so they leverage a $5000 margin at 10:1 (10 X 5000).
Hypothetically, over the contract period, Microsoft stocks go from $250 to $260. The trader’s initial position has increased from $50,000 to $52,000. This earns them a $2000 gross profit.
Some charge overnight fees calculated daily. In this example, we’ll assume a 6% interest calculated daily overnight.
Net profit will change depending on the commissions that the broker charges, normally between 0.03% and 0.08%. Bear in mind that these commissions are charged on opening and closing positions. This means you must pay the commission fee twice.
The trader’s final profit will equal their profit, minus fees. Assuming they are charged 0.05% in this example, it would work out as follows:
Net Profit = Profit – Opening Commission – Interest – Closing Commission
Net Profit = (52,000-50,000) – (50,000X0.05/100) – (50,000X0.06/365) – (52,000X0.05/100)
Net Profit = 2000 – 25 – 8.21 – 26
Net Profit = $1940.79
CFD vs Investing
CFDs and investing are two different techniques traders use to speculate on the performance of a particular market.
The main difference between CFD trading and investing is that with CFDs, at no point does the trader own the speculated security. CFDs are simply contracts that speculate on whether a security will trend upwards or downwards over a pre-determined length of time.
Investors own, either in part or in whole, the stock, currency, or commodity they are investing in. This also means that investors can only make money when their investment gains value.
With CFD trading, it is possible to make a profit even when the underlying asset drops in value. This is called “going short.”
CFD vs Spread Betting
CFD trading and Spread Betting are similar in many ways. They are both speculative forms of trading based on the performance of an underlying instrument. They are also both frequently traded using leverage and margins.
Spread Betting is often done through third-party over-the-counter (OTC) brokerages. The retail brokers on this list do not provide any form of spread betting. Because of their OTC nature, it is possible to place spread bets on company stocks that are not publicly listed.
One of the largest differences between Spread Betting and CFD is that Spread Betting is not seen as an income, and therefore is not subject to capital gains taxes. Spread Bets are also not charged fees and commissions.
>> Check Out Our: Spread Betting Brokers
Spread Betting is viewed more as a form of gambling. Because of this, it is not suitable for Muslim traders.
Strategies Used For CFD Trading
There is a wide variety of different trading strategies for CFDs. We’ve made a list of the three most popular strategies used in CFD trading. Each of these strategies has a range of different methods and techniques for executing the trades, but the fundamentals remain the same.
Day trading is one of the most popular forms of CFD trading. It refers to traders taking a position for a single trading day. The position is closed at the end of each day.
>> Looking for the best broker? Check out our guide on the Top Rated for Day Trading
One of the reasons this strategy is effective is that it mitigates the gapping risk – where overnight news can affect a company’s stocks. This strategy also eliminates overnight charges. Stocks and shares are the most common instruments used in day trading as they can have large fluctuations within a trading day, unlike commodities.
Swing traders take advantage of general trends by trying to make trades at the time a market instrument makes a large shift in one direction.
Financial markets rarely move in a straight line. If an asset or commodity is trending upwards, there will tend to be a large upwards swing as traders quickly start investing.
Swing traders aim to get in on the swing, either upwards or downwards, to capture a large profit over a short period of time.
Scalping is a trading strategy that relies on short-term, small but frequent profits. It takes advantage of minor fluctuations in the market over minutes or hours.
Traders will take a position and buy or sell their contracts after small changes in market instruments. Scalpers will rarely, if ever, keep their positions overnight.
Some platforms, like eToro, do not facilitate scalping as the high trade volume puts pressure on their servers. If you plan on utilizing scalping as a strategy, ensure your broker will allow it.
Countries where you can trade CFDs
Most countries allow CFD trading, but there are exceptions.
CFD trading is illegal in the USA, Brazil, Belgium, and Hong Kong.
Residents in these countries can still trade CFDs, but they have to use brokers who are regulated outside their region. This carries significant risks since these tend to have lower levels of security and trust.
Risks of CFD Trading
As with all forms of trading, CFDs carry their share of risks. Many have risk management tools such as stop-losses and alerts. Traders are encouraged to use these tools to protect themselves against major financial losses.
As a rule of thumb, never put in more than you are willing to lose.
Trading with leverage has its benefits, but there are also significant drawbacks. The recent Gamestop-Reddit saga is an excellent case study in the potential harm of trading with leverage.
Brokers leverage a trader’s initial margin to secure a larger position. Traders earn the profits from their leveraged position, but they could also lose. This means it is possible to make losses that exceed your initial investment.
Traders should be aware that across various platforms, more than two-thirds of traders lose money when trading CFDs.
Types of CFD brokers
CFD brokers fall into two distinct categories – Dealing Desk (DD) and No Dealing Desk (NDD).
DD are also known as market makers. In a CFD trade, a DD broker takes the other side of a trader’s position.
DD earn their profits when the trader makes a loss, and vice-versa. Many traders see this as a potential conflict of interest. There have been instances in the past where brokers have been caught actively working against their client’s trades.
DD are advantageous in that they offer fixed spreads.
NDD brokers utilize straight-through-processing (STP) to link a trader’s CFD bid to a third-party liquidity provider. Because of this, NDD are not involved in the trade, they only facilitate it.
Many traders feel more comfortable with NDD since they are not party to the trade. They have no interest in whether the trader wins or loses.
Types of accounts
Although brokers may call their account options by any name they wish, there are essentially three different account types to choose from.
Demo accounts are an important feature in any trading platform. Traders can utilize demo accounts to experiment with various strategies and markets without risking any real money.
Access to a demo account is a must to any would-be trader.
These are entry-level accounts available to most potential traders. The minimum deposit to open an account could range anywhere from $0-$500. The features available to standard account holders will change depending on the brokerage. Some limit access to research tools and educational resources. Users with standard accounts tend to pay a higher commission rate on their trades than premium account holders.
The amount needed to open a premium account varies, but it tends to be around $10,000.
Premium account holders have access to all the features of the trading platform. They will often have access to exclusive events and webinars to help them succeed. Because the positions these account holders take will be larger, they pay lower commission rates for their trades.
How do they make money?
Brokers make money in two ways.
Firstly, they charge a commission for trades. They will take a percentage of the opening and closing position of every trade. Although this percentage is small (less than 1%), the volume of trades the broker executes every day makes up for it.
A DD broker will make money off of their clients’ losing trades. Because DD brokers take the opposite position of their clients’ CFD, whenever a client wins, they have to pay out. When a client loses, they pay their losses to the broker.
Why are CFDs banned in the US?
The Securities and Exchange Commission (SEC) ruled against OTC stock options owing to their volatility. According to the SEC, the high-risk nature of leveraged trading and the fact that the majority of traders lose money on trades.
Can You Get Rich Trading CFDs?
It is definitely possible, if not likely, to make money trading CFDs. Other people have done it in the past. But potential traders should be aware that the vast majority of traders lose money on CFD trades. It may not sound as exciting, but the more reliable way to turn a profit is to invest in long-term markets that generally trend upwards.
Is CFD Trading Tax Free?
Unlike spread betting, which is considered a form of gambling, CFD trading is seen as income. This means that the returns traders make on CFDs are subject to income and capital gains tax. The upside of this is that losses can be written off as a tax deduction.
Is CFD Trading Gambling?
CFD trading isn’t considered gambling. Traders with a keen eye on the market can accurately predict the movement of the underlying security. Although it’s not considered gambling, potential traders should be aware that CFDs are speculative in nature. Even the most obvious predictions can go awry.
Is it safe?
CFD trading is considered highly volatile. Traders should be aware that the majority of CFD traders lose money. It is not considered safe.
Can you lose more than you invest?
If you are trading on leveraged margin, it is possible to lose more than you invest. Leverage increases your exposure to potential profit, but it also increases the amount you could lose.