CFD trading is the buying and selling of CFDs, or contracts for difference, a way of speculating on financial markets that doesn’t require the buying and selling of any underlying assets
CFD trading allows you to trade markets like equities, forex, indices and commodities without having to buy and sell shares, currencies or futures. Instead you trade a contract known as a CFD, a form of derivative that offers several advantages over traditional trading.
Long vs short
You don’t have to use a CFD to mimic a standard trade – you can also open a CFD position that will increase in value as the underlying market decreases in price. This is referred to as selling or going short, as opposed to buying or going long.
If you think Apple shares are going to fall in price, for example, you could sell a share CFD in the company. You’ll still exchange the difference in price between when your position is opened and when it is closed, but will earn a profit if the shares drop in price and a loss if they increase in price.
With both long and short trades, profits and losses will be realised once the position is closed.
You can also use a CFD to get exposure to a much larger position than with a standard trade. Using leverage, you can agree to exchange the difference in price of a larger amount of an asset without having to commit to the full cost of the position at the outset.
Say you wanted to open a position equivalent to 500 Apple shares. With a standard trade, that would mean paying the full cost of the shares. With a CFD, you might have to only put up 5% of the cost.
You’ll still exchange the difference in price of 500 Apple shares from when your position is opened to when it is closed, so your profit and loss will still be calculated on the full size of your position. That means that profits can be hugely multiplied: but that your losses can as well, even above your original deposit.
Why do traders use CFDs?
Beyond the ability to go short and make use of leverage, there are several key reasons why traders use CFDs:
- You don’t have to pay stamp duty. You can also offset losses against future profits as a tax deduction1
- You can access thousands of available markets. A CFD can be used to trade a huge range of markets, including markets that are exclusive to derivatives, like interest rates and stock indices
- All on a single platform. Instead of having to trade via a stock broker, forex provider and a futures exchange, you can access all your markets on one platform
- You can trade when the underlying market is closed. If you need to close a position overnight you often can do thanks to 24-hour trading, and certain key markets are tradable over the weekend with sunday trading.
Choosing the best CFD brokers for stock trading
When choosing between the best online CFD stock brokers, it’s important that you look into reputed websites for additional broker comparison. An online CFD broker should have the ability for executing the trades that you order for and to manage these trades from your online account. We listed the best online brokers for 2018. Feel free to try out these brokers and check out the reviews for them.
Characteristics of online CFD stock broker sites
An online CFD broker’s website is different from the regular trading and investment websites. The site should allow simple navigation for all users, whether they are a novice or expert traders. Traders should have access to the various market types through the site. The online CFD stock broker should provide up-to-date research by professional analysts.
The best CFD stock broker comes down to making sure that you ask the best questions for determining your CFD trading needs. Our guide looks at the most relevant questions and topics to ensure that the CFD broker that you choose is ideal for you.
Tips on choosing the best CFD brokers to trade CFDs
- It’s important that you choose an online stock broker that offers traders narrow spreads and cheaper finance for the various CFD products
- Pick a broker who provides the essential trading tools and the app for mobile trading
- Choose a CFD stock broker who complies with rules and regulations and offers specialised asset classes
- Online CFD stock brokers should have access to tap into the global markets
- Choose an online CFD stock broker who allows traders to open an account with a minimum deposit
Compare the selected brokers and simply open a free account with the broker that fits you best. We highly recommend brokers with a free demo account so you will be able to get to know the platform before by live trading without risk. Best of luck!