An ever-increasing number of traders are moving away from buying stocks and other assets outright and moving towards contracts for difference (CFDs). With CFD trading, you can speculate on the price of a share, currency, or commodity without owning the asset itself.
That comes with several advantages, including the ability to bet that an asset’s price will fall and the option to trade with leverage. In addition, CFD trading is often less expensive, more accessible, and more flexible than traditional forms of stock and forex trading.
In this guide, we’ll cover everything you need to know about CFD trading in the UK. We’ll explain how it works and what you can trade, plus offer tips and CFD trading strategies you can use to trade more successfully. In addition, we’ll reveal the UK’s best CFD trading platform in 2021.
Table of Contents
How to Trade CFDs in 3 Steps
Want to jump into CFD trading right away? You can get started in just three quick steps:
Step 1: Open a CFD Account
Sign up for a trading account with one of our recommended UK CFD brokers.
Step 2: Fund Your Account
Deposit funds in your new trading account using a debit/credit card, e-wallet, or bank transfer.
Step 3: Demo and Live Trading
Practice CFD trading with a demo account, then place your first live CFD trade when you’re ready.
75% of retail investors lose money when trading CFDs with this provider.
What is CFD Trading?
CFD trading involves buying and selling contracts for an asset rather than the asset itself. CFD trading means that you and your broker agree to exchange the difference between the value of the underlying asset when the CFD contract is bought and when it is sold.
To understand how CFDs work, let’s use stock CFDs as an example. When you buy a stock CFD, the value of your CFD contract rises as the price of the stock increases. The price of the CFD is the same as the price of the underlying stock at all times, so a 1% rise in the share’s value causes a 1% rise in the CFD’s value. However, you never actually own the stock itself – only the CFD, which is a contract between you and your broker.
Online CFD trading can be extremely useful for trading a wide variety of assets. If you want to speculate on the price of oil, for example, it’s much easier to engage in oil trading through CFDs than by buying oil outright. If you were to buy crude itself, you’d have to arrange to transport the barrels and store them somewhere. When you buy CFDs, you get the same financial exposure to changes in the price of oil without ever having to handle physical barrels of oil.
CFD Trading Fees
Like most types of trading, CFD trading isn’t free. However, it can be very cost effective compared to trading assets directly
Most of the top CFD brokers in the UK operate on a commission-free model. That means that you don’t pay a flat fee of several pounds per trade regardless of how much money you trade.
Instead, you pay for your trades through a spread, which is the difference between the price you can sell a CFD contract for and the price you can buy it for. Typically, this difference is small – it may be a fraction of a pence for many share and forex trades. Typical stock brokers that offers CFD trading charges a spread of around 0.1% per trade.
Percentage-based spreads are generally a good thing for traders. For most beginner CFD traders, these spreads are much cheaper than commissions. Spreads are also good because there’s no penalty for making multiple trades – so you can easily scale into and out of positions, a strategy that helps reduce your trading risk.
An important thing to keep in mind is that CFDs often carry extra fees if you hold positions overnight. Online CFD trading is best for day traders who want to open and close positions quickly. Generally, long-term investors are still better off if they buy shares outright rather than trading CFDs.
CFD Trading Example
How does CFD trading work in practice? Let’s look at how to buy Tesco shares using CFDs to illustrate the process.
One Tesco CFD costs the same as one share of Tesco – around 223p. Let’s say you buy one CFD at 223p, and then the price of Tesco shares rises to 250p. Your CFD would now be worth 250p as well, and you can sell it to realize a profit of 27p (11%). You never actually own Tesco shares at any point during this trade, rather only the contract with your broker to exchange the difference in the share price over the course of your position.
What Financial Instruments Can You Trade as CFDs?
One of the exciting things about CFDs is that you can trade almost any financial instrument with CFDs. Most online CFD trading is for common assets like shares, forex, commodities, and cryptocurrencies. Many CFD brokers in the UK offer CFDs for hundreds to thousands of global stocks, dozens of forex pairs, and a handful of top commodities like oil, wheat, and gold.
But you can also trade CFDs for UK bonds, ETFs (exchange-traded funds), index futures, and stock options. CFDs can even be used to speculate on the value of less frequently traded assets like real estate.
Benefits of CFD Trading
CFD trading in the UK has a number of advantages over directly trading assets. Let’s take a look at some of the key reasons why many traders are turning to CFDs:
One of the biggest advantages to trading CFDs is that they unlock leverage. When you trade CFDs, you have two options. You can use the money in your CFD trading account to fully fund your position. Or you can establish a position that is several times larger than the size of your trading account. With 10:1 leverage, for example, you can buy £1,000 pounds worth of CFDs with just £100 in your account.
This has two benefits. First, you can magnify your profit from a successful trade. When you apply 10:1 leverage, you see a return on investment of 10% for every 1% move in the price of the underlying asset. This is critical for forex trading, since currencies often only move a fraction of a percent at a time. With leverage, you can multiply those tiny movements into returns of several percent or more.
Second, leverage enables you to diversify your portfolio. Say you have £1,000 in your trading account. With 10:1 leverage, you can buy £1,000 pound each of 10 different stocks through CFDs. The more diversified your portfolio, the better you are protected from a drop in any one market sector or asset.
Another big plus to CFD trading in the UK is that it’s relatively inexpensive. Most CFD trading platforms are commission-free, so you save money every time you place a trade. In addition, since you can use leverage, you only need a small amount of money to start trading.
CFDs are widely available, which makes online CFD trading for beginners a good option. You can sign up for a single CFD trading account and get access to stocks, forex, commodities, and more. CFDs are easy to trade and don’t come with any of the logistical headaches that otherwise come with trading physical assets.
When trading CFDs, you often don’t have to purchase a whole contract. Instead, you can use what’s known as fractional investing.
This is essential if you want to buy Bitcoin or another expensive asset. One Bitcoin CFD costs more than £8,000. But most CFD brokers will let you purchase just a fraction of a Bitcoin CFD. In many cases, you can invest just £50. That makes some expensive assets, like gold and Amazon shares, much more accessible to the average trader.
One additional benefit to online CFD trading is that you don’t necessarily have to bet that the price of an asset will rise. You can also speculate that the price will drop, and profit from that drop. This involves short selling CFD contracts to your broker rather than buying them.
Note that betting against an asset with CFDs comes with some additional risks since it requires you to trade on margin. Beginners should be very cautious about short selling CFDs.
CFD Trading Risks
CFD trading comes with the same risk as trading assets directly. If the value of the underlying asset falls after you buy a CFD contract, you can lose money. You can either realize a loss immediately, or hold the CFD contract in the hope that its value increases again.
Importantly, CFD trading can be riskier than trading assets directly if you use leverage. With leverage, any loss in the value of the underlying asset is magnified. With 10:1 leverage, for example, a 1% drop in the price of a stock can lead to a 10% drop in the value of your CFD position.
On top of that, since you’re borrowing money from your broker, you have to pay interest fees on leveraged positions. This can further add to the magnitude of losses when trading CFDs. Depending on how much leverage you use and how long you hold a leveraged CFD position, it is even possible that interest fees can wipe out a profitable trade.
Given these risks, it’s important for traders to be very cautious when trading with leverage. Start small and carefully consider whether leverage is required for your trade to succeed.
CFD Trading Strategies
There are many different approaches you can take to trade CFDs. The key thing is that you approach every trade with a clear strategy to guide you. To help, let’s take a look at three common CFD day trading strategies that you can use.
Market Neutral Trading
One of the simplest CFD trading strategies that you can use is to assume that the market generally reverts to a mean price. Under this model, when the price of an asset is higher than average, it is expected to move back down to the mean. When the price is lower than average, it is expected to rise back up to the mean.
Of course, prices do trend over time. So it’s important to use this CFD trading strategy carefully. Look for assets that are trading sideways rather than in a specific direction. Also watch out for high trading volume, which can signal that an asset is likely to make a strong and sustained upward or downward movement.
Momentum trading is another easy CFD day trading strategy for beginners. You simply follow what the market is already doing by jumping into a strong upward or downward trend. Look for high trading volume, which typically signals that a trend is continuing.
An important component of momentum trading is that you don’t try to time the top of bottom of the price movement. Rather, it’s best to capture the middle of the price move, when momentum is strongest. You might miss out on some profits this way, but you also eliminate the risk of getting in before a trend is established or holding your position for too long.
Pivot points are a popular system for CFD trading, although they are somewhat complex. Pivot points can be calculated using your broker’s technical charting software based on the high, low, and closing price of an asset.
Pivot points are meant to define support and resistance bands. These in turn offer information about where an asset is likely to experience a major price breakout or experience a reversal. Pivot points should be used in conjunction with other technical indicators to provide more information about what will happen when an asset’s price reaches a support or resistance level.
CFD Trading Tax UK
Trading CFDs has some important tax implications in the UK. Notably, when CFD trading in the UK, you’re not responsible for the stamp tax. This is a 0.50% tax that’s normally levied on stock trades. So, you automatically save 0.50% on the value of your trade every time you use CFDs to buy shares.
However, CFD trading doesn’t get you out of the capital gains tax like spread betting does. Your capital gains tax rate will depend on your individual tax situation. But beware that the capital gains tax can be as high as 20% for any profits you make from CFD trading, regardless of what assets underlie your contracts.
CFD Trading Tips
Before you jump into CFD trading, it’s important to take it slow and understand what you’re doing. Here are five CFD trading tips that you can use to get the most out of your trading experience.
- Try a UK CFD Trading Demo Account
The best way to get started with CFD trading is to practice with a demo account. Almost every CFD trading platform comes with a demo account where you can place trades without risking real money. A paper CFD trading account is a great way to try out a new trading strategy and get a feel for how leverage works without taking on any risk.
- Don’t Get Greedy
An all too common mistake that beginners make is to hold CFD positions for too long. It’s better to lock in profits than to get greedy and end up seeing the value of your position drop. If you’re worried about missing out on further upside from a trade, consider selling 75% of your position and just holding onto the remaining 25%.
- Protect Your Downside
There’s always a risk when CFD trading that the trade will go against you. This can lead to steep losses if you don’t practice good risk management, especially when trading with leverage. You can limit your loss from a bad trade by always placing stop loss orders. With this type of order, your broker will automatically sell your position if the value of your CFD drops below a specified level.
- Focus on a Few Assets
It’s easy to get carried away with the wealth of assets you can trade through CFDs. But you’ll be more successful if you focus on just a few stocks, currency pairs, or commodities to start. Become an expert on the price fluctuations of, say, Lloyds shares, and you’ll be better poised to capture profits from small movements in that stock.
- Stick to Your Strategy
Always approach trades with a clear CFD trading strategy. You should have a defined reason why a specific asset is ripe for CFD trading. Don’t trade stocks that are in the news just because they’re getting hyped. Your strategy should also include defined entry and exit points. It’s okay to re-evaluate your exit strategy midway through a trade, but you should have a very good reason for doing so.
Best CFD Trading Platforms 2021
There are dozens of stockbrokers but you could also choose a UK forex broker that offer CFD trading in the UK. Some of these are top-tier brokers with excellent CFD trading platforms and commission-free trades, while others charge hidden fees and offer a limited range of assets. So, it’s important to choose a broker that matches your needs.
To help you pick, let’s take a look at three of our favourite UK brokers for CFD trading:
1. eToro - All-Round Best CFD Trading Platform in the UK
eToro stands out among CFD brokers for offering a huge range of assets to trade. With this broker, you can trade CFDs for more than 800 stocks and 450 ETFs, plus forex, cryptocurrencies, commodities, bonds, and indices. All trades come with 0% commission, and eToro’s spreads are typically lower than the industry average.
What really sets eToro apart is its built-in social trading network. With this broker, you can easily connect with thousands of other CFD traders in the UK and around the world. Helpfully, the social network also enables you to gauge traders’ sentiment around specific stocks and forex pairs.
eToro also offers copy trading, which you won’t find at many other top UK CFD trading platforms. With this feature, you can set a portion of your portfolio to automatically copy the positions of expert traders. It’s essentially auto-pilot for your brokerage account.
- Trade 800+ stock CFDs
- Forex, crypto, commodity, and bond CFDs
- 0% commission trading
- Massive social trading network
- Supports copy portfolios
- Charges a withdrawal fee
2. Plus500 - Low-Price CFD Broker with Tight Spreads
Plus500 is another top UK CFD trading platform. This broker offers trading on more than 500 stocks from the US and UK along with dozens of forex pairs and commodities. All trades are commission-free and Plus500 charges some of the tightest spreads we’ve seen from any CFD broker.
This broker sports an advanced, yet easy to use trading platform. It comes packed with nearly 100 technical indicators and versatile price charts. You can also access an economic calendar and news feed from inside your CFD trading account.
Even better, Plus500 has a mobile CFD trading app to help you trade CFDs from anywhere (Find out more about the best trading apps here). You can set price alerts on your mobile device, too, so that you never miss an opportunity to buy CFDs at a discount.
- Extremely tight CFD spreads
- Advanced technical charting
- CFD trading app with price alerts
- Offers most major and minor forex pairs
- Integrated economic calendar
- Doesn’t support custom technical studies
3. FinmaxFX - New CFD Trading Platform with High Leverage
FinmaxFX is a new CFD broker that was launched in 2019. This broker is particularly notable for the high leverage it offers to traders. As FinmaxFX isn’t licensed in Europe, it is able to offer leverage of up to 1:200 leverage – much higher than other UK brokers.
This CFD trading platform offers a wide range of trading instruments, covering stocks, forex, cryptocurrencies, commodities and bonds. Trading on FinmaxFX takes place on MetaTrader 5, so you’ll have access to plenty of advanced trading tools.
FinmaxFX also offers some useful educational and analysis resources, including financial news, market reviews and technical analysis. One downside of this platform is that the spreads aren’t as low as other brokers, and there are also deposit and withdrawal fees to consider.
- Up to 1:200 leverage
- Financial news and analytical resources
- Supports MT5
- Not licensed in the UK
- Higher spreads than other brokers
CFD Trading Pros & Cons
How to Start CFD Trading in the UK
Ready to start trading CFDs? We’ll show you how to get started in just three steps using eToro as your brokerage.
Step 1: Sign Up for a UK CFD Trading Account
To sign up for an online CFD trading account with eToro, just head to the broker’s homepage and click ‘Join Now.’ You’ll need to create a new username and password for your account, then fill in some basic personal details like your name, contact information, and birth date.
eToro is a regulated broker licensed by the UK’s Financial Conduct Authority, so you have to verify your identity to start trading. To complete this step, upload a copy of your passport or driver’s license and a copy of a utility bill or financial statement.
Step 2: Fund Your Account
Now you can fund your trading account. eToro accepts a wide variety of payment methods, including debit and credit cards, e-wallets, and bank transfers. Just note that the broker requires a minimum initial deposit of £140.
Step 3: Place a CFD Trade
Once your account is funded, you’re ready to place your first CFD trade. From the eToro dashboard, search for a specific asset (like a stock or forex pair) or browse popular assets to trade. When you’ve found what you want to trade, click ‘Trade’ to open a new order form.
In the order form, you’ll need to tell eToro how much money you want to trade in CFDs. You can also specify how much leverage to use for your trade, if any. We recommend entering a stop loss level to limit your losses if the trade goes against you, and you can also set a take profit level if desired.
Once your trade is ready, click ‘Trade’ to complete your CFD order.
CFD trading offers a way to trade stocks, forex, commodities, and more without owning the underlying asset. This type of trading offers several important benefits, including the ability to trade with leverage and the option to bet that the price of the underlying asset will drop. For many traders, buying and selling CFDs is actually less expensive than buying stocks or forex pairs outright.
Like all trading, CFD trading carries risk. So, it’s important to approach every trade with a clear strategy and to practice good risk management techniques. We recommend starting out with a demo CFD trading account before moving on to live trading so you can get the most out of CFD trading in the UK.
If you feel like CFD trading might be for you, we recommend trying eToro. With low spreads, a fantastic range of assets, and innovative copy trading tools, eToro is our pick for the best CFD trading platform in the UK. Simply click the link below to sign up today!
eToro: Best CFD Trading Platform 2020
- Tight spreads and low fees
- Huge range of assets
- Social and copy trading
- Accepts PayPal
- Strictly regulated
What is the difference between CFD trading and spread betting?
CFD trading and spread betting are very similar in that both enable you to speculate on the price of an asset without owning it. Importantly, profits from spread betting are not subject to capital gains tax in the UK, whereas profits from CFD trading are.
Do stock CFDs pay dividends?
Stock CFDs do pay dividends, the same as if you owned the underlying stock outright. Your CFD trading platform will credit any dividends directly to your account.
Is CFD trading halal?
CFD trading is not halal. However, some brokers offer Islamic trading accounts that are halal. These accounts remove all overnight fees and commissions to remain in compliance with Islamic law.
What are the best books on CFD trading?
If you’re looking to learn more about UK CFD trading, we recommend ‘CFDs Made Simple: A Beginner's Guide to Contracts for Difference Success’ by Jeff Cartridge and Ashley Jessen and ‘Making Money From CFD Trading: How I Turned $13K Into $30K in 3 Months’ by Catherine Davey.
What is the best CFD trading app?
The best CFD trading app depends on what features and trading tools are important to you. That said, we like eToro’s trading app because it offers commission-free trading on a wide variety of assets, an advanced charting platform, and a social trading network.
Is it possible to take a CFD trading course?
Yes, you can take a CFD trading course to learn more about CFDs and to practice day trading strategies. Some brokers offer interactive online courses, or you can sign up for an online course taught by expert traders.