Contracts of Difference (CFDs) are one of the hottest trading vehicles for UK traders who crave convenient access to categories like stocks, indices, and commodities. Considering the many positive features CFDs offer — including their accessibility, flexibility, and diversity — is it any wonder UK traders have a plethora of FCA-regulated CFD brokers to choose from nowadays? Indeed, there are so many CFD brokers online that it can feel overwhelming to pick what’s the best UK CFD trading platform.
Thankfully, many distinguishing features like fees, integrations, and educational resources set different brokers apart and make it easier for traders to pick the best CFD trading platform in the UK. It’s well worth the time to carefully consider different CFD trading providers and ensure you’re making the right pick for your pounds.
Best CFD Trading Platforms
SpreadEX
- Minimum deposit: £0
- Deposit methods: Bank transfer, card
- Withdrawal fee: £0
- Currency conversion fee: Low
- Rating: ⭐⭐⭐⭐
Not to be confused with the sports betting platform tied to the same company, “SpreadEX” is a London-based broker focused on offering UK traders easy access to financial trading services like CFDs.
On top of CFD trading in markets such as stocks, indices, and forex, SpreadEX traders can try their hand at spread betting (and reap the associated tax benefits with this trading strategy). As a bonus, the FCA-licensed SpreadEX integrates with the TradingView charting platform, and it’s available as both a mobile app and a web-based service.
While some may find SpreadEX’s features a bit too basic, others appreciate its competitive fee structure, easy-to-understand interface (including TradingView integration), and award-winning customer service division. Oh yeah, as a unique perk, you can stay in the loop on global markets with a free Financial Times subscription (provided you deposit £500 into SpreadEX).
| ✅ Pros | ❌ Cons |
| Established reputation since 1999. | Limited to shares, indices, forex, and commodities. |
| No inactivity or custodian fees, no minimum deposit. | Does not support the MetaTrader platform. |
| Integration with TradingView. | |
| Negative balance protection on “Limited Risk” account. | |
| 24/7 customer service from Monday to Thursday, with limited hours on Friday and Sunday. |
However, there are some limitations to be aware of. Spreadex does not offer MetaTrader 4 or 5, which might be a drawback for those accustomed to these platforms. Also, it is primarily focused on CFDs and spread bets without options for physical share dealing.
SpreadEX TrustPilot Reviews
Spreadex Trading receives overwhelmingly positive feedback for its efficient service, user-friendly platform, and excellent customer support. Many users praise the tight spreads, quick execution of trades, and the abundance of helpful tools. Long-term customers highlight the reliability and ease of use of the platform, while newcomers find the educational resources beneficial. A few users noted issues with account verification and high spreads during illiquid market conditions, but overall, Spreadex is highly regarded for its market coverage and responsive customer service.
Trade Nation
- Minimum deposit: £0
- Deposit methods: Bank transfer, card
- Withdrawal fee: £0
- Currency conversion fee: 0.0%
- Rating: ⭐⭐⭐⭐
Trade Nation has been helping UK traders enter CFD positions with extremely tight spreads since its start in 2014. Indeed, one of Trade Nation’s key value propositions is its fixed spread function, which means the difference between bid-ask stays the same, unlike a variable fee structure.
Trading Nation argues this fixed fee model provides better transparency and cost savings to traders engaged in CFD trading for its available markets, which include forex, indices, stocks, commodities, and cryptocurrencies.
Other reasons some traders prefer Trade Nation is its integration with the popular MetaTrader 4 platform and its proprietary and user-friendly TN Trader. Traders new to the markets can harness the wisdom of Trade Nation’s community with the TradeCopier app, which allows you to see what others are trading and mirror their holdings.
Although there are complaints over the lack of educational resources and analysis on Trade Nation, this is a noteworthy choice for people most concerned about trading fees and spreads.
| ✅ Pros | ❌ Cons |
| Interest on unused cash funds. | Lacks advanced charting tools and integrations. |
| No maintenance fee with one annual purchase. | Better for beginners than advanced traders. |
| Commission-free trading up to €100,000 per month. | Commission fees after the €100,000 limit. |
| Comprehensive educational resources and free demo account. | |
| User-friendly interfaces on xStation 5 and xStation Mobile. |
Trade Nation TrustPilot Reviews
Trade Nation has garnered positive feedback for its efficient customer service, fair spreads, and user-friendly platform. Users appreciate the quick withdrawal process, responsive support, and educational resources that cater to both beginners and experienced traders. While some experienced issues with deposits and platform navigation, the support team was praised for resolving problems promptly. However, a few users reported poor trade execution and technical difficulties. Overall, Trade Nation is recommended for its reliability and commitment to improving the trading experience.
AvaTrade
- Minimum deposit: £0
- Deposit methods: Bank transfer, card
- Withdrawal fee: £0
- Currency conversion fee: 0.0%
- Rating: ⭐⭐⭐⭐⭐
Founded in Ireland in 2006, AvaTrade is another popular FCA-registered CFD broker offering trading services to UK residents. Although AvaTrade isn’t a publicly listed company, it’s often hailed as one of the most respected thanks to its nine official accreditations around the world. Traders on AvaTrade enjoy access to CFDs for a wide range of asset categories, including indices, commodities, stocks, options, and cryptocurrencies.
| ✅ Pros | ❌ Cons |
| Diverse markets, including cryptocurrencies and options. | High inactivity fee after three months of non-use. |
| Regulated in nine jurisdictions globally. | Extra charges like overnight premiums and unimpressive spreads. |
| Supports MetaTrader 4 and MetaTrader 5. | Complaints about the speed of AvaTrade’s desktop platform. |
| AvaProtect for enhanced risk management. |
You can access these financial instruments through one of AvaTrade’s proprietary platforms — including WebTrader and the AvaTrade App — or by integrating with MetaTrader 4 or MetaTrader 5. AvaTrade also has access to social trends via its mobile app and an optional AvaProtect feature to preserve your portfolio against losses within a given timeframe.
Although AvaTrade has a lot to offer CFD traders of all skill levels, it doesn’t have the highest reputation for providing attractive spreads, and there are additional fees to consider, such as inactivity, administration, and overnight premiums. Still, these fees may be a worthwhile tradeoff for the unique benefits of using the AvaTrade suite.
AvaTrade TrustPilot Reviews
AvaTrade receives high praise for its user-friendly platform, responsive customer service, and swift account setup. Many users commend the personal assistance they receive shortly after account creation, highlighting the helpfulness of the support team. The platform’s educational resources and variety of trading options, including forex and commodities, are well-regarded. However, some customers report issues with persistent calls and withdrawal problems, sparking frustration. Despite occasional negative feedback, the majority of traders appreciate AvaTrade’s efficiency and trading tools.
CMC Markets
- Minimum deposit: £0
- Deposit methods: Bank transfer, card
- Withdrawal fee: £0
- Currency conversion fee: 0.0%
- Rating: ⭐⭐⭐⭐
CMC Markets is a publicly traded company on the London Stock Exchange that has been helping traders since its start in the 1980s. One attractive feature of CMC Markets is its wealth of product offerings for CFDs and spread betting, including standard choices like shares, ETFs, forex, and indices, plus treasuries, commodities, and cryptocurrencies. With a CMC Markets account, you’ll get access to these assets through the company’s highly-rated, proprietary Next Generation trading interface, as well as a mobile app and integration with MetaTrader 4.
| Pros ✅ | Cons ❌ |
| Extensive asset range, including cryptocurrencies and treasuries. | Various fees for CFD trading, including holding, inactivity, and data feed fees. |
| Compatible with MetaTrader 4. | Limited charting tools and no TradingView integration. |
| Provides live phone support during market hours. | |
| Competitive forex trading rates. |
While many users praise CMC Markets’ competitive forex fees, the commissions and additional costs for CFDs aren’t as attractive. There are also some complaints about the relative lack of analytics and charting tools with CMC versus other platforms, which includes no TradingView integration. However, CMC Markets remains a mighty name in CFD trading thanks to its long reputation for security and access to many markets.
CMC TrustPilot Reviews
CMC Markets is highly praised for its transparency, ease of use, and solid platform, especially for small accounts and beginners. Many users appreciate the fast execution of trades, excellent customer service, and detailed daily and monthly reports. However, some have experienced issues with setup processes, overseas access, and account closure difficulties. Overall, CMC Markets is valued for its reliability, competitive spreads, and user-friendly interface, making it a preferred choice for many traders despite occasional service hiccups.
City Index
- Minimum deposit: £0
- Deposit methods: Bank transfer, card
- Withdrawal fee: £0
- Currency conversion fee: 0.0%
- Rating: ⭐⭐⭐⭐
Also founded in the 1980s (but now part of the NASDAQ-listed StoneX Group), City Index is a highly decorated CFD and spread betting provider with access to asset categories such as indices, shares, and commodities. Traders interested in forex also frequently use City Index due to its reputation for offering attractive fees on foreign currency pairs.
Although the fees for CFD trading are generally higher than competitors, City Index provides users access to its user-friendly mobile app and Web Trader, plus integrations with TradingView and MetaTrader 4. Another selling point for City Index is its high advertised rate of trade confirmations (99.99%) and average confirmation speed of 0.02 seconds.
| Pros ✅ | Cons ❌ |
| 40-year track record and listed on the NASDAQ. | Higher-than-average CFD trading fees according to traders. |
| Integrates with TradingView and MetaTrader 4. | No cryptocurrency trading options. |
| Offers both spread betting and CFD trading. | Complaints about hidden fees and withdrawal delays on Trustpilot. |
| Fast execution speeds, averaging 0.02 seconds. |
Given City Index’s reputation for reliability and speed — as well as its connection to multiple trading interfaces — it’s an attractive choice for CFD traders who want multiple analytics options and a dependable broker. However, City Index doesn’t score excellent marks for its CFD fees and has some additional charges such as account inactivity.
While City Index may not have as many attractive features for beginners (e.g., copy trading or investment options), it’s a solid contender for active CFD traders looking for a fast, trusted, and flexible broker.
City Index TrustPilot Reviews
City Index receives high marks for its efficient customer service, user-friendly platform, and quick issue resolution. Many users appreciate the helpful and responsive support team, making account management and trading straightforward. The platform’s ease of use, coupled with features like fast withdrawals and a range of trading tools, makes it popular among traders. However, some users have encountered issues with promotional promises and platform glitches. Despite these occasional setbacks, City Index remains a preferred choice for many due to its reliability and excellent customer care.
Pepperstone
- Minimum deposit: £0
- Deposit methods: Bank transfer, card PayPal
- Withdrawal fee: £0
- Currency conversion fee: 0.01%
- Rating: ⭐⭐⭐⭐
Pepperstone is a highly regarded online broker based in Melbourne, known for offering UK traders access to a broad array of asset categories, including forex and CFDs on commodities, stocks, and indices. Their Razor platform, known for its competitive pricing, offers some of the industry’s tightest spreads with no commission.
For trading platforms, Pepperstone supports popular tools such as MetaTrader 4/5, cTrader, and TradingView, ensuring a seamless trading experience with advanced charting and analysis capabilities.
| Pros ✅ | Cons ❌ |
| Regulated by multiple Tier-1, Tier-2, and Tier-4 authorities | Average educational resources compared to leading competitors |
| Offers MetaTrader and cTrader platforms, suitable for algorithmic and copy trading | Competitive pricing mainly benefits active traders on Razor accounts; average for retail traders |
| Great for CFDs | |
| Multiple social copy trading platforms available | |
| New proprietary mobile app with a good variety of features |
Pepperstone’s focus on forex and CFDs might seem limiting to some, but their reputation is bolstered by multiple awards and regulatory accreditations from bodies like the FCA, CYSEC, and ASIC. Their transparent pricing and fee structure are particularly appealing, with no deposit or withdrawal fees, making it cost-effective for traders.
The broker’s platforms are praised for their user-friendliness and are equipped with a variety of tools such as Autochartist and cTrader Automate, for automated trading. However, beginners might find Pepperstone’s educational offerings somewhat lacking compared to other brokers, which could be a drawback for those new to trading.
Overall, Pepperstone excels in providing trading tools and responsive customer service, making it a strong choice for both novice and professional traders. The broker’s flexibility with account types, including Islamic accounts and demo accounts, further enhances its appeal
Pepperstone TrustPilot Reviews
Pepperstone garners praise for its exceptional customer service, swift problem resolution, and user-friendly platform. Many users commend the prompt and helpful responses from account managers, contributing to a seamless trading experience. The platform is noted for its competitive spreads, quick withdrawals, and efficient execution. However, a few users reported difficulties with withdrawals and trade closures. Overall, Pepperstone stands out as a reliable broker with top-notch support, making it a preferred choice for both novice and experienced traders.
XTB
- Minimum deposit: £0
- Deposit methods: Bank transfer, card
- Withdrawal fee: Free, but you can withdraw £50 or more
- Currency conversion fee: 0.5%
- Rating: ⭐⭐⭐
Founded in 2002, XTB is a multi-asset, multinational trading platform with its roots in Warsaw, Poland. This publicly traded company offers UK investors access to CFDs for stocks, ETFs, commodities, forex, and indices, but it distinguishes itself from the pack with the choice to swap real shares and ETFs.
XTB also doesn’t charge commissions on share or ETF trades, provided you stay within a €100,000 per month threshold. For those who aren’t always active in the markets, XTB also offers attractive interest-accruing accounts on cash plus beginner-friendly investment plans with automated features.
Add in user-friendly features on the xStation 5 and xStation Mobile app — plus the extensive education and training hub — and it’s clear why XTB appeals to beginner or intermediate CFD traders. Advanced or high-volume traders may not entirely fall in love with XTB, but it remains a competitive option in the CFD market.
| ✅ Pros | ❌ Cons |
| Interest on unused cash funds. | Lacks advanced charting tools and integrations. |
| No maintenance fee with one purchase annually. | Better suited for beginners than advanced traders. |
| Commission-free trading for stocks and ETFs up to €100,000 per month. | Commission fees apply after the €100,000 limit. |
| Extensive educational resources and free demo account. | |
| Easy-to-use interfaces on xStation 5 and xStation Mobile. |
Leverage up to 1:30 is available in the EU and UK, while global clients and pro traders can access up to 1:500.
XTB offers over 4,000 instruments, including major forex pairs, popular stocks, global indices, and various commodities. The xStation 5 platform includes advanced order types such as OCO and trailing stops, algorithmic trading capabilities, and an integrated economic calendar and news feed.
One consideration is the inactivity fees, which could be a drawback for traders who don’t engage regularly, as it introduces additional costs. Despite this, the extensive selection of day trading tools on the xStation 5 and the basic web-based platform provide support for various trading activities.
XTB TrustPilot Reviews
XTB Online Investing has received mixed feedback on TrustPilot, with users appreciating its user-friendly platform, extensive educational resources, and responsive customer support. Positive reviews highlight the variety of trading instruments, competitive spreads, and helpful account managers. However, some users report issues with technical glitches, withdrawal delays, and concerns about data protection and customer service. Despite these challenges, many traders remain loyal, valuing the platform’s continuous improvements and low commissions.
Fee Comparison of the Best CFD Trading Platforms
Trading fees can and should be an important aspect of the selection process. Below, I will discuss the specifics of our CFD trading platform selection, focusing on spreads, commissions, and other fees.
Trading costs include spreads (the difference between buying and selling price) and commissions (flat fee or percentage of trade value). These costs add up, especially with frequent trading or high volumes. Commissions vary between brokers, from flat fees to percentage-based ones.
For a $1,000 trade, this can range from $1 to $5. Overnight fees (swap rates) are also a factor, especially for longer holding periods. Research shows even small differences in fees affect profitability, particularly for active traders. Hidden fees like withdrawal charges or inactivity fees exist, so reading the fine print is important.
| Broker | S&P 500 CFD Spread | Apple CFD Fee | GBPUSD Spread | EURUSD Spread | Rating |
| SpreadEX | 0.4 | $11.7 | 0.8 | 0.6 | ⭐⭐⭐⭐ |
| XTB | 0.5 | $9.4 | 1.6 | 0.8 | ⭐⭐⭐ |
| Trade Nation | 0.3 | $4.2 | 0.7 | 0.3 | ⭐⭐⭐⭐ |
| AvaTrade | 0.5 | $6.6 | 1.5 | 0.9 | ⭐⭐⭐⭐⭐ |
| CMC Markets | 0.6 | $11.59 | 0.9 | 0.7 | ⭐⭐⭐⭐ |
| Pepperstone | 0.4 | $7 | 0.2 | 0.1 | ⭐⭐⭐⭐ |
| City Index | 0.4 | $10 | 1.8 | 0.8 | ⭐⭐⭐⭐ |
How do brokerage fees work?
As a trader or investor, you should always remember that buying and selling stocks is not, and never will be, free. Brokers must make money somehow, don’t they? When you’re buying and selling shares, mutual funds, or other investment products, trading fees from a brokerage can kick in. This is true whether you use an online or traditional full-service broker. Each broker varies in what fees they charge and how much you’ll pay.
Some brokers charge a flat fee per trade, while others have a percentage-based fee. For instance, a flat fee might be £5 per trade, whereas a percentage-based fee could be 0.1% of the transaction amount. While they might seem tiny, especially on bigger portfolios, these fees can add up over time, particularly for active traders.
There are also hidden fees to be aware of, such as inactivity fees, annual account fees, or fees for accessing research reports.
There are also brokers who offer zero-commission trades on certain products. These can be enticing, but reading the fine print is important. Often, these brokers compensate for the lack of commission by charging higher fees elsewhere, such as for currency conversion or withdrawal fees. Let’s take a look at some of the most common fee types.
Commission
Commissions can either be a flat fee per trade or based on the traded volume. In the US, many brokers charge a flat fee, like $5 per trade, or calculate the fee based on the number of shares traded, such as $0.005 per share. This method is not very advantageous if you are buying shares at a very low price. For instance, buying $1,000 worth of shares priced under $1 each would cost you $5 in commission, whereas purchasing shares priced at $100 each would only cost you $0.05.
In Europe and the UK, brokerage fees on stock trades are usually based on trade volume. If you buy 100 BMW shares at £70 each and the commission is 0.1% of the trade volume, you’ll pay £7. This fee applies to both buying and selling. Some brokers also have a minimum charge, like £10 per trade.
Many brokerages now offer zero-commission trading for stocks, ETFs, and options. This especially benefits those trading smaller amounts, like less than $500 per trade, as you avoid minimum fees. Zero-commission trading has become quite popular in the last 10, as more investment platforms and apps are becoming available.
Despite the appeal of zero commissions, some traders still prefer paying a small brokerage fee for better execution. According to Fidelity spokesman Robert Beauregard, while the headline might be zero commissions, some custodians could be selling order flow for money.
It’s important to remember that commissions are rarely waived for other products like bonds, mutual funds, futures, CFDs, or forex. Always check how brokerage fees apply to these investments.
How commissions work for share CFDs
Imagine I want to buy CFDs for Apple shares. I place a £10,000 trade. Apple is priced at £226.34. I expect the price to rise to £240. The bid-offer spread is 240–226.34.
I will pay a 0.1% commission when opening the position and another 0.1% when closing it. For a long position, there’s an overnight financing charge, usually the LIBOR interest rate plus 2.5%.
I buy 44 contracts at £226.34 per share, making my trading position £9,958.96. If the share price rises to £240 in 16 days, the final value is £10,560.
My profit (before charges and commission) looks like this:
- £10,560 – £9,958.96 = £601.04 With a 0.1% commission, I pay £10 upon entering the position.
- If interest charges are 7.5%, I must pay this for each of the 16 days the position is held (44 × £226.34 × 0.075 ÷ 365 = £2.04 per day).
- Over 16 days, the total charge is 16 × £2.04 = £32.64.
- When closing the position, I pay another 0.1% commission fee of £10.
My net profit, after deducting charges, is:
- 601.04 (profit) – 10 (commission) – 32.64 (interest) – 10 (commission) = £548.40 (net profit)
Spread
The spread is the difference between the buy and sell price, also known as the bid and ask price. It represents another type of brokerage fee. If you buy and sell a share at the same time, you’ll incur a loss equal to the spread. For example, if the buy price of a share is £151 and the sell price is £150, you’ll lose £1 on the trade. The spread cost increases with the spread size.
Well-known stocks like Apple or Microsoft often have minimal spreads, sometimes as low as 1p per share. Similarly, popular currency pairs like EUR/USD have narrow spreads, while exotic pairs like ZAR/JPY have higher spreads.
Stockbrokers such as Interactive Brokers and Saxo Bank use market spreads for most assets, applying the market bid and ask price without embedding their fees into the spread. Instead, they charge commissions, making this method more transparent and often more cost-effective.
CFD brokers, however, include their brokerage fees within the quoted spreads, leading to wider spreads compared to the true market spread but typically without additional commissions.
Overnight rate
A financing rate, also known as an overnight rate, is a fee charged by brokers when you hold a leveraged position for more than a day. This is common in forex or CFD trades. A leveraged position means you’re borrowing money from the broker to trade, and for this borrowed money, you pay interest. This fee is essentially the cost of using the broker’s funds to maintain your position overnight.
Margin (interest) rate
As we said above, trading on margin involves borrowing money from your broker to trade. For instance, with a margin account at a US broker, if you deposit £5,000, you can buy stocks worth more than £5,000, but you’ll pay interest on the borrowed amount.
Interest rates can vary significantly between brokers. Even when interest rates were low, some brokers charged over 5% for USD margin, while others reduced their rates to 1-2% as the Federal Reserve cut rates.
Conversion fee
A currency conversion fee is applied when your transaction involves changing one currency to another. This can happen when you trade or when you deposit and withdraw money in different currencies.
For example, buying a USD-denominated share like Apple using your GBP brokerage account requires converting GBP to USD. Some brokers allow manual conversions before trading, which might save you money.
Deposits and withdrawals also incur these fees if your brokerage and bank accounts are in different currencies. The conversion fee might be a spread-only fee or include a commission, which can add up if you trade frequently.
You can reduce or eliminate these fees by maintaining sub-accounts at the same broker in different currencies. For instance, having both GBP and USD accounts lets you trade in both currencies without constant conversion fees.
How Did We Choose the Platforms
There are numerous trading platforms available, and we constantly review them.
- UX & Design: When it comes to UX and design, we seek platforms with a balance of convenience and advanced features. Investment options should be diverse, providing flexibility for traders to create varied portfolios.
- Efficiency: An efficient platform ensures you can execute trades swiftly and analyse the market effectively. Platforms like MetaTrader 4 and 5 are popular for among experienced traders.
- Security: We evaluate asset storage, cybersecurity measures, and protections like the Financial Services Compensation Scheme (FSCS).
- Fees: Transparent fee structures are vital. We look for platforms with competitive rates and minimal hidden charges.
- Resources: Educational resources and customer support are essential. Platforms praised for their research tools, like Avatrade and Saxo Bank, rank highly. Reliable customer service is a must.
- Regulation: Regulatory standards are non-negotiable. We prioritise FCA-regulated platforms with global credentials.
- Asset Coverage: We made sure each broker offers a wide range of assets. Whether you’re interested in stocks, indices, commodities, forex pairs, or cryptocurrencies, the broker should have a diverse portfolio.
- Features: Extra features, such as automated trading and social trading options, also influence our recommendations. These added bonuses can make a platform more appealing.
What is CFD Trading
Instead of traditional trading, which involves the actual buying and selling of stocks, CFD trading involves speculating on the price of assets like shares, indices, commodities, and forex. A CFD, or ‘contract for difference’, allows traders to trade based on price movements without owning the asset itself.
A contract for differences (CFD) is an agreement between a buyer and a seller where the buyer pays the seller the difference between the asset’s current value and its value at contract time.
CFDs let traders profit from price movements without owning the underlying asset. The value lies in the price change between entry and exit.
With CFDs, you can profit from both upward and downward price movements. If you buy a CFD and the asset’s price goes up, you can sell the CFD for a profit. The difference between the purchase and sale price is your gain, settled through your brokerage account. Conversely, if you expect the asset’s price to drop, you can open a sell position and close it by buying an offsetting trade, with any losses settled through your account.
Going long vs going short
When trading CFDs, you’re basically predicting whether an asset’s price will rise or fall. If you think the price will go up, you’ll ‘buy’ (go long); if you think it will fall, you’ll ‘sell’ (go short).
Select’ buy’ on the deal ticket to open a long position on the platform of your choice. For a short position, choose ‘sell’. Always ensure you’re aware of the risks involved before trading.
CFDs and leverage
CFDs offer higher leverage than traditional trading, meaning you can control a larger position by dispensing less of your own money. Current regulations set standard leverage in the CFD market, ranging from 3% (30:1 leverage) to 50% (2:1 leverage).
Lower margin requirements allow for greater potential returns, but they also amplify potential losses. For instance, a 30:1 leverage means you only need 3% of the trade’s value as your initial investment, but this also means any losses are magnified by the same factor. CFDs are always traded on margin. Therefore, brokers require specific account balances to permit such transactions.
If you do not want to take on leverage, share dealing might be a more suitable option for your risk appetite.
Pros and cons of CFD trading
| Pros ✅ | Cons ❌ |
| High Leverage and Volatility Traditionally, blue-chip stocks lacked appeal for high-risk traders. CFD’s, however, offer leverage, enabling high-risk, high-reward trading with reliable stocks, improving both fundamental and technical analysis. | High Leverage Risks While leverage can amplify gains, it can also accelerate losses. Trading heavily on margin can lead to rapid financial declines if the market moves against you. |
| Ease of Long and Short Trades Trading both long and short is straightforward with CFD’s, making them excellent for hedging and protecting positions in volatile markets. | Financing Costs Holding CFD’s overnight incurs financing fees on the entire asset amount, with providers adding their own percentage on top of the central bank rate. |
| Solving Liquidity Issues CFD’s can resolve liquidity problems by providing market maker contracts that do not affect the share price, ensuring stable trading conditions. | Tax Implications Taxes are applied when each CFD is closed, which may be viewed differently based on individual circumstances. Unclosed losses at year-end cannot offset gains unless positions are closed. |
| Diverse Product Range CFD’s offer a wide variety of trading options, including currencies, stock indices, global shares, commodities, metals, and more. | |
| Mirroring Underlying Shares Unlike options, CFD’s generally match the price of the underlying shares, avoiding the inflated costs associated with market sentiment. | |
| Low Commissions and Interest CFD’s often have competitive pricing compared to equity shares and do not incur GST. Additionally, short CFD’s can accrue interest. | |
| No Expiry DateCFD’s do not expire, allowing traders to hold positions as long as desired without worrying about losing extrinsic value. |
How CFD Trading Works
Suppose a trader wants to buy (go long) a CFD on Tesla shares. The broker requires a 5% deposit for the trade. The investor buys 100 Tesla shares at $249.69 each, creating a $24,969 position, but initially pays the broker only $1,248.45.
- Asset: Tesla (TSLA)
- Position: Long (Buy)
- Trade Size: 100 CFDs
- Opening Price: $249.69 per share
- Initial Position Value: $24,969.00
- Deposit (Margin): 5% of position value = $1,248.45
- Holding Period: 2 months
Fees and Costs:
- Spread: Let’s assume a typical spread of $0.10 per share.
- Spread Cost: 100 CFDs * $0.10/CFD = $10.00
- Commission: Let’s say the broker charges a $10 commission per trade (opening and closing).
- Total Commission: $10.00 * 2 = $20.00
- Overnight Financing: This is interest charged for holding a leveraged position overnight. Let’s assume an annual interest rate of 8%, calculated daily.
- Approximate Daily Financing Cost: ($24,969 * 8%) / 365 days = $5.45 per day
- Total Financing Cost (Estimated for 60 days): $5.45/day * 60 days = $327.00
- Inactivity Fee: Some brokers charge a fee if you don’t trade for a certain period. We’ll assume there’s no inactivity fee in this case.
Two months later, Tesla shares are trading at $300 each, and the trader exits with a $50.31 per share profit, totalling $5,031.The CFD is cash-settled. The initial $24,969 position and the closing $30,000 position are netted. So we have:
Outcome:
- Closing Price: $300.00 per share
- Profit: ($300.00 – $249.69) * 100 CFDs = $5,031.00
- Total Costs: $10.00 (Spread) + $20.00 (Commission) + $327.00 (Financing) = $357.00
- Net Profit: $5,031.00 – $357.00 = $4,674.00
Cash Settlement:
Since it’s a CFD, you don’t own the actual Tesla shares. Instead, the broker calculates the difference between your opening and closing position values:
- Closing Position Value: $300.00 * 100 CFDs = $30,000
- Net Difference: $30,000 – $24,969 = $5,031 (This is your gross profit)
After deducting the fees of $357, the broker credits your account with a net profit of $4,674.
Important Considerations:
- Leverage: The 5% margin requirement means you’re using 20x leverage. This amplifies your gains (as seen here) but also your potential losses.
- Margin Calls: If the market moves against you, your broker might require you to deposit more funds to maintain your position.
- Tax Implications: CFD profits are typically subject to capital gains tax.
- Broker’s Role: The broker acts as your counterparty in the trade, so their financial stability is important.
Of course, it should be noted that most (about 80%) CFD traders lose money in the long term. While I know few can resist the appeal of rapid profit, it should always be noted that successes like that involve exhaustive research and razor-sharp decision making.
Is CFD trading right for you?
The most appealing fact about CFD trading is that it allows you to gain money from falling markets. However, you can only do that by trading on margin, and that’s essentially betting with borrowed money. I would never do it, but then again, the profit potential is just too high.
CFDs are not suitable for beginners. It’s essential to assess your risk tolerance, financial goals, and trading experience before considering CFD trading. In addition, you really need to know the market you want to trade in, which means using proprietary algorithms, expensive tools, and reading tons of news to take advantage of market speculation.
Ultimately, deciding whether CFD trading is right for you is a personal choice. Weigh the potential benefits and risks carefully, consider your experience and risk tolerance, and always prioritise education and risk management.
Top Ten Mistakes And Risks For CFD Traders
Trading CFDs carries unique risks and common dangers found in many investment types. Knowing these risks helps you steer clear of potentially hazardous situations.
- Opening Too Many Positions: Many traders focus on finding the lowest margin requirements to maximise their earnings but then open too many positions, risking all their capital. When trading in margin, just one bad trade can wipe out your trading capital due to leverage effects. Always keep spare cash.
- Being Confused By Many CFD Options: CFDs cover all kinds of products, from precious metals to commodities like coffee and international stocks. While diving into another country’s economy may seem tempting, take a moment and ask yourself: “What do I really know about their economic climate? Am I trading on emotion or knowledge?“. Trading CFDs without knowing the first thing about what you’re trading is a great way to lose all your money.
- Know Why You’re Trading: Continuing from the previous point, treat trading as a money-making activity, just like a business. Trading for fun rarely results in profits. Use leverage cautiously and always inform yourself about what you’re getting into.
- Having No Strategy: CFDs are often traded in short time frames, making it hard to predict movements accurately. However, trading CFDs still requires a strategy. Without a solid plan, you might fall into the trap of over-trading, driven by emotions rather than logic. Over-trading often leads to poor decisions and losses, as professional traders exploit emotional responses.
- Trading Against the Trend: Some traders try to profit by buying falling stocks or shorting rising ones, hoping for a reversal. This can be especially risky with CFDs. Unlike equity shares, where a loss might be 30-40%, CFD losses can be magnified due to leverage, potentially reaching 600%. It’s best to avoid going against the trend in highly leveraged trades.
- Trading Too Large a Position: Given the leveraged and speculative nature of CFDs, it’s wise to never invest more than you’re willing to lose. New traders might start with reasonable amounts but quickly increase their stakes after a winning trade, driven by overconfidence and greed. This can lead to significant losses when the market moves against them. Revenge trading, or trying to recover losses by increasing stakes, is another pitfall that can deplete your funds rapidly.
- Not Using Stop-Losses: Stop-losses can prevent you from losing a big percentage of your money, but some traders remove them after experiencing whipsaw movements that close their positions prematurely. If the market moves drastically and you’re unavailable to exit, this can lead to staggering losses. Without stop-losses, you might hold onto losing positions too long, worsening your position.
- Trading on Emotion: Trading when emotionally weak, such as during personal upheavals, is a recipe for disaster. It’s also important to sell off risky shares and stick to safer ones. Greed can be a downfall. Take your profits and move on.
- No Rights: With a CFD contract, you don’t have the rights that a shareholder does, such as voting rights. This might not matter to everyone, but it’s a risk to consider if such rights are important to you.
- Long-Term Trading With CFDs: CFDs might be too risky for long-term investors. Holding a highly-margined CFD for a long time can force you out of your position due to leverage, and the overnight financing fees can erode your profits over time.
Understanding these risks and developing a disciplined trading strategy can help mitigate the dangers associated with CFD trading. Always ensure you manage your risks effectively and avoid emotional decision-making.
How to Become a CFD Trader
To become a CFD trader, start by choosing a regulated broker that offers CFD trading, like the ones above. Once you’ve selected your broker and completed your registration on their platform, decide on a trading style, pick an asset, and determine whether you think the asset’s price will rise or fall.
If you want to start your trading journey, register for a free demo account on the broker of your choosing to practice in a risk-free environment before moving on to live markets. This will help you hone your skills and test your strategies effectively.
- Picking a trading style: Your trading style depends on your time horizons and how long you hold positions. Scalping involves trades held for seconds to minutes, while day traders hold positions for minutes to hours but never overnight. Swing traders look for opportunities developing over several days, and position traders hold trades for weeks, months, or even years. Shorter time horizons require intense focus, while longer ones allow for less screen time.
- Picking an asset: Forex markets are very liquid and operate 24/5, making them popular with traders with short time horizons. Volatility, often driven by economic news, creates opportunities for scalpers and day traders. CFDs are available on a variety of assets, including shares, commodities, forex, cryptocurrencies, and bonds. Choose an asset you know well or have a strong interest in, and be prepared to put in the work to understand it.
- Go long or short: After selecting your asset, research thoroughly to decide whether to go long or short. Experienced traders utilise charts to analyse recent trends and plan their trades accordingly.
- Diversify: Diversify your portfolio across different markets as you become more comfortable with CFD trading. Successful traders minimise risk by not overexposing themselves to any single market. Research and take positions in various markets to spread risk.
CFD Taxation
With the rise of Contracts for Difference (CFD) trading in the UK, it’s important to understand the tax implications that come with them. When used wisely, CFDs can help diversify your investment portfolio.
However, like any financial instrument, it’s important to grasp the associated risks and tax rules before diving in. Here’s a straightforward guide to the tax aspects of CFD trading.
In the UK, CFDs are typically subject to Capital Gains Tax (CGT) rather than income tax. This means that any profits you make from trading CFDs are considered capital gains. If your total gains exceed the annual CGT allowance, you will be liable to pay tax on the excess amount. The current CGT allowance and rates can vary, so it’s advisable to check the latest figures on the HMRC website.
One benefit of CFDs is that you can offset your losses against your gains for CGT purposes. This can reduce your overall tax liability, making CFDs a tax-efficient trading option.
Stamp duty
A notable advantage of CFD trading is that you don’t have to pay Stamp Duty on your transactions. Unlike buying shares outright, where Stamp Duty is typically payable, CFDs do not incur this cost, potentially making them a more cost-effective way to trade.
How much tax will I pay?
You only pay Capital Gains Tax on your total gains above the tax-free allowance. Your gain is the difference between the purchase price of the asset and its selling price.
For the 2024/25 tax year, the CGT allowance is £3,000. It was previously £6,000 for the 2023/24 tax year.
When calculating capital gains tax from CFD trading, only the profits are considered. For example, if you stake £10 and earn £25, you only consider the £15 profit. HMRC allows traders to offset gains with losses from the previous four years. So, if you have £5,000 in profits and £2,000 in losses, you only owe tax on £3,000.
The tax rate depends on your annual income. If you earn £50,271 or more, your capital gains tax rate is 20%. For those with an income between £12,571 and £50,270, calculate your total taxable income, which includes both your basic income and capital gains. If the sum is under £50,270, the capital gains tax rate is 10%. Anything over that threshold is taxed at 20%.
For instance, if you earn £40,000 and have £10,000 in capital gains in a year, your total taxable income is £50,000. Since this is below £50,270, the capital gains are taxed at 10%. However, if you have £15,000 in capital gains, making your total income £55,000, the first £10,270 of gains are taxed at 10%, and the remaining £4,730 at 20%.
Government’s CFD scheme
The government’s Contracts for Difference (CfD) scheme is unrelated to CFD trading. The CfD scheme supports low-carbon electricity generation by incentivising investments in renewable energy and guaranteeing a fixed price for the duration of the contract. This has nothing to do with trading financial CFDs.
Using CFDs For Hedging: How Does It Work?
CFD hedging is an advanced approach to managing investment risks. Essentially, it involves taking a position in a CFD that is opposite to the one held in your main investment, aiming to balance out potential losses. While it doesn’t completely eliminate risk, it certainly offers a valuable layer of protection.
Defensive Short Positions
One of the common hedging strategies is taking defensive short positions. Imagine you own shares in a company and suspect their value might drop temporarily. By short-selling a CFD of that company’s shares, any loss in your portfolio can be offset by gains from the short position. This method is particularly useful when you foresee market turbulence affecting your holdings.
Let’s imagine you’re holding 1,000 shares of Microsoft (MSFT) stock, valued at $300 each. You’re a long-term believer in Microsoft, but you’re worried about a short-term downturn due to upcoming economic reports. Rather than selling your shares, you decide to hedge using CFDs.
You decide to open a short (sell) position on 100 MSFT CFDs, with each CFD representing one share of Microsoft. Of course, you set a stop-loss order on your CFD position to manage potential losses.
Scenario 1: Market Declines
If Microsoft’s stock price drops to $280 per share:
- Your stock portfolio loses $20 per share. With 1,000 shares, this results in a loss of $20,000.
- However, your short CFD position gains $20 per CFD. With 100 CFDs, this results in a gain of $2,000.
- This gain partially offsets the loss in your stock portfolio.
Scenario 2: Market Rises
If Microsoft’s stock price rises to $320 per share:
- Your stock portfolio gains $20 per share. With 1,000 shares, this results in a gain of $20,000.
- However, your short CFD position loses $20 per CFD. With 100 CFDs, this results in a loss of $2,000.
- This loss partially offsets the gain in your stock portfolio.
Market Hedging with Index CFDs
Another technique is using index CFDs to hedge against market-wide risks. For example, if you have a portfolio full of tech stocks and expect a downturn in the tech sector, short-selling a tech-heavy index like the NASDAQ 100 can help. If the sector declines, the profit from your index CFD can counterbalance your portfolio losses.
Hedging with the volatility index (VIX)
The VIX, often called the ‘fear index’, measures market volatility. If you anticipate increased market turbulence, going long on a VIX CFD can be a smart move. When market volatility spikes, the value of your VIX CFD typically increases, helping to offset losses in other parts of your portfolio. However, this strategy is complex and requires a deep understanding of market sentiment.
Hedging currency risks
Currency fluctuations can also impact your investments, especially when dealing with foreign assets. For instance, if you’re a UK investor with US stocks, a decline in the USD against the GBP can erode your returns. By shorting the USD against the GBP through a CFD, you can protect your investment from adverse currency movements.
Risk-Management tools
Effective hedging with CFDs also involves using several risk-management tools.
- Optimal Hedging Ratio: This is the portion of your portfolio that you decide to hedge. Hedge too little, and you remain exposed. Hedge too much, and you incur unnecessary costs. A common approach is the 1:1 hedging ratio, where the value of the hedging position equals the value of the underlying asset position.
- Stop-Loss Orders: These are automatic instructions to close a position if the market moves against you by a specified amount, helping to limit losses.
- Take-Profit Orders: These orders automatically close a position once it reaches a pre-set profit level, locking in gains.
- Leverage Management: CFDs allow margin trading, amplifying gains and losses. Managing leverage wisely is key to preventing significant losses.
- Hedging Time Frame: The duration of your hedge should align with your investment goals and market conditions. Short-term hedges protect against immediate fluctuations, while long-term hedges offer stability against prolonged volatility.
- Testing Your Strategy: Using a demo account to test your hedging strategy in a risk-free environment can be incredibly beneficial.
While CFD hedging is a powerful strategy, it’s not a one-size-fits-all solution. It requires a solid grasp of market dynamics and a thoughtful approach. It’s about balancing protection against potential losses without stifling your portfolio’s growth potential.
CFD Trading Strategies: Building a trading plan
Before diving into trading, it’s important to understand CFDs (Contracts for Difference). I repeat: do not jump into CFDs without knowing EXACTLY what they are. CFDs are leveraged products, meaning you only need a small deposit (margin) to control a larger position. While this can amplify profits, it can also magnify losses, potentially exceeding your initial deposit.
Successful trading starts with a solid plan that will help you define your motivations, time commitment, goals, risk tolerance, capital, and strategy. Customising your plan based on your unique objectives and risk appetite is essential. Important aspects of your plan should include:
- Motivation: Why do you want to trade?
- Time Commitment: How much time can you dedicate?
- Trading Goals: What do you aim to achieve?
- Attitude to Risk: How much risk are you willing to take?
- Available Capital: How much money can you invest?
- Risk Management: Strategies to manage and mitigate risk
- Markets to Trade: Which markets interest you?
- Trading Strategy: Your methodology for trading
- Record Keeping: Tracking your trades to review performance
Your trading strategy outlines how you’ll enter and exit trades, including the tools and indicators you’ll use. Different strategies, like day trading, swing trading, or scalping, require different levels of time commitment and market monitoring. Regularly review your trades and back-test your strategy to ensure its effectiveness.
| Time Frame | Scalper | Intraday | Swing | Position |
| 1M (Monthly) | X | |||
| 1W (Weekly) | X | |||
| 1D (Daily) | X | |||
| 4H (4-Hour) | X | X | ||
| 1H (1-Hour) | X | X | ||
| 30m (30-minute) | X | |||
| 15m (15-minute) | X | |||
| 5m (5-minute) | X | |||
| 1m (1-minute) | X |
The three most common strategies are scalping, day trading, and swing trading. Each has its own set of advantages and challenges, so let’s dive into the details to help you choose the best one for your needs.
Scalping
Scalping is all about high-frequency trading, where securities are bought and sold within seconds or minutes. The goal is to make small profits from numerous trades. Scalpers often use leverage, which means they can amplify both gains and losses. It’s a method that requires a fast and reliable internet connection and a computer that can handle rapid trades without freezing.
Scalpers rely heavily on technical analysis to spot short-term trends and patterns. The key is to capture small market moves while maintaining strict stop-loss levels to manage risk. This means you might only need a few trades per day to achieve your targets.
Advantages of scalping include the ability to quickly profit from market movements. However, the need for constant focus and the stress of high-frequency trading can be intense. Scalping demands discipline and quick decision-making skills.
Day Trading
Day trading involves buying and selling securities within the same trading day. Unlike scalping, day traders hold their positions for a few hours, capitalising on short-term market trends. They use both technical and fundamental analysis to make informed decisions.
Day traders aim for larger profits from fewer trades compared to scalpers. The amount of capital needed depends on the leverage offered by your broker. High leverage can reduce the capital required, but it also increases risk.
The main advantage of day trading is the potential for significant profits within a single day. However, it requires a high level of focus and can be stressful due to the need for constant market monitoring. Discipline and a solid risk management strategy are essential.
Swing Trading
Swing trading is a medium-term strategy where securities are held for days or weeks. Swing traders use technical and fundamental analysis to identify market trends and patterns over the medium term. This strategy is ideal for those who prefer to avoid the high stress of intraday trading.
Swing traders aim for larger profits from fewer trades, making it suitable for those with bigger accounts. The longer holding periods mean that liquidity and slippage are less of an issue compared to scalping and day trading.
One major advantage of swing trading is the potential for significant gains without the need for constant market monitoring. However, it requires patience and a higher level of investment. Successful swing traders often avoid frequent chart checks to prevent unnecessary adjustments to their trades.
CFD Trading Tips
Trading companies are pretty clear about this: 76% of people who get into CFDs lose money in the long run. You will see this warning everywhere. So, if you ask me, the best tip would be to educate yourself on investing and learn how to build wealth in a more sustainable way. However, I can’t deny the appeal of trading. Below are some tips for day trading, from a person who is not a fan of day trading:
- Use a Demo Account If You Are a Beginner: I cannot stress this enough – CFDs are exclusively for more experienced traders. If you don’t know enough about the topic, please use a demo account first to familiarise yourself with the process. It will help you immensely.
- Use Stop-Loss Orders: The most important rule in CFD trading is to use stop-loss orders. They limit your downside by automatically closing your position at a predefined loss level. Consider using guaranteed stop-loss orders to avoid slippage during volatile market conditions.
- Start with a Demo Account: Before you risk real money, practice with a demo account. This allows you to test strategies and understand market dynamics without financial risk. Set the virtual amount to what you would realistically trade with to get a true sense of potential outcomes.
- Do Your Homework: Understand the basics of CFD trading and the specific markets you plan to trade. Familiarise yourself with different order types, like limit orders and market orders. Focus on a niche market to build expertise rather than trying to master all asset classes.
- Limit Leverage: While leverage can amplify profits, it can also magnify losses. Using high leverage can force you to close positions prematurely if the market moves against you. Stick to lower leverage ratios, particularly in the EU where regulators have set a 30:1 limit on major currency pairs.
- Use the Right Trade Position: Not all brokers allow you to adjust leverage manually. If yours doesn’t, consider reducing your trade size to manage risk. Always be aware of your total risk exposure.
- Conduct Your Own Research: Relying on others’ success stories, like your neighbour’s Bitcoin gains, is risky. Conduct thorough research and analysis, both fundamental and technical, to make informed decisions.
- Devise a Trading Strategy: Plan your trades meticulously. Decide in advance where to set your stop-loss and take-profit levels. Consider various scenarios, such as how you’ll react if the market moves 5%, 10%, or 50% against your position.
- Cut Your Losses: If a trade isn’t going your way, don’t chase losses. Stick to your strategy and predefined stop-loss levels. Avoid emotional trading, which can lead to further losses.
- Understand Leverage’s Dual Nature: Leverage can boost your profits, but it can also increase your losses. Make sure you’re comfortable with the potential risk and only use leverage levels you can manage.
- Prepare for Rainy Days: Always keep sufficient equity in your account to cover additional margin requirements. Some brokers will liquidate your positions without notice if you fall below margin requirements, often at the worst possible time.
- Diversify Your Trades: Diversification reduces risk. Don’t concentrate your trades in one sector or asset class. For instance, don’t put all your money into oil stocks or crude oil if you’re bullish on the sector. Spread your investments across various uncorrelated markets.
- Choose a Reliable CFD Broker: Selecting a reputable broker is key. Look for brokers with competitive fees and reliable trading platforms. Be wary of scams and ensure your broker is regulated by reputable authorities. A good broker can significantly influence your trading success.
- Use Stop-Loss Orders: Again. You can end up in debt with margin trading. So, make sure to use stop-loss orders.
Frequently Asked Questions
What is the best CFD trading platform in the UK?
The “best” CFD trading platform in the UK will depend on your individual needs and preferences. However, some platforms, like Pepperstone and Trade Nation are consistently ranked highly for their features, fees, and overall user experience.
Can you trade CFDs in the UK?
Yes, you can trade CFDs in the UK. It’s a popular form of derivative trading that allows you to speculate on the price movements of various financial assets without owning the underlying asset itself.
However, it’s important to be aware that CFD trading involves a high degree of risk, and about 80% of retail investor accounts lose money when trading CFDs. Therefore, it’s crucial to understand the risks involved and to trade responsibly.
Can you make a living from CFD trading?
CFD trading is difficult, and statistics show that around 75% of retail traders lose money. However, those who are experienced and disciplined with risk management can be consistently profitable. It’s essential to have a thorough understanding of financial markets and adopt professional trading habits.
To generate a livable income, the size of your CFD trading account is crucial. For example, to aim for an income of £100,000 a year with a 10% annual return, you would need an account balance of £1,000,000. Smaller accounts, like £20,000, would not yield sufficient income even with higher percentage returns due to the proportionality of profits to the account size.
Therefore, making a living from CFD trading is possible but requires a combination of consistent profitability and a substantial account balance. Without both, it is unlikely to achieve a sustainable income from CFD trading alone. Therefore, I wouldn’t recommend it as a full time job.
