CFDs, or contracts for difference, are derivative instruments used by traders to places bets on all types of securities without actually holding the underlying assets. Trading of this type originated in London, but CFDs have taken off in popularity thanks to minimal fees and terrific margin percentages. CFDs are also highly speculative and banned in a number of countries, including the United States.
Disclosure: 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.
Table of Contents
- Getting Started with Trading CFDs
- What are CFDs?
- Why Trade CFDs?
- Benzinga's Top Picks for CFD Brokers
- Let the CFD Trading Begin
- Frequently Asked Questions
Getting Started with Trading CFDs
Getting started on CFDs is just as easy as opening a traditional brokerage account. Just find a broker that fits you and fund your account. Remember, CFD trading is banned in the United States, so no American regulatory authority allows this market.
Most CFD brokers follow the rules and are regulated by some international body, but some offer very little oversight. Make sure your broker is legit before signing up! Between 70 to 80% of retail investors lose money trading CFDs. Check the websites of the brokers listed below — they’ll flat-out tell you most people lose money trading CFDs. Be aware of the risks before you open an account.
Step 1: Find a Broker That Offers CFDs
You won’t find a regulated U.S.-based broker to trade CFDs since they’re banned in the U.S., but international traders still have plenty of brokerage choices. Before you choose a broker, make sure it’s regulated by the Financial Conduct Authority (FCA), European Securities and Markets Authority (ESMA), or another government entity. Working with a reputable online broker is one of the most important aspects of CFD trading.
Step 2: Find an Instrument You Want to Trade
Once you’ve found a broker that fits your needs, it’s time to make that first trade. Go through your broker’s selections and choose the type of market you want to bet on. Here’s what you’ll find available at most CFD providers:
- European stocks/indices
- U.S. stocks and indices
- Forex
- Commodities
- Cryptocurrencies
Pay attention to the spreads here, especially in a no-commission account. Commodity and forex trades are usually done on the thesis of economic and political uncertainty, while stock and index CFDs are done on a micro level. Pick a market and select your instrument to trade.
Step 3: Fund Your Account and Execute Your Trade
Once you’ve decided what type of CFD to buy, fund your account and decide how much capital you want to put into the trade. Remember, CFD brokers usually give you margin rates around 2-3%, compared to 50% with traditional brokers.
Only a small amount of money is needed to record big wins in the CFD market, but beware the hazards of CFD trading. If business is done with an unscrupulous broker, you might be out of money even if you’re on the right side of the trade.
What are CFDs?
A contract for difference is simply a financial agreement between two parties, one deemed the buyer and one deemed the seller. CFDs are written for a number of different bets on financial products, including stocks, indexes, currencies and commodities.
Sellers of CFDs expect the underlying asset to decline in price, while the buyer expects the price to increase. Let’s say a CFD is drawn up over PayPal shares, currently priced at $94.91 per share. If the price has increased to $96.97 by the end of the contract term, the seller must pay the buyer $2.06 per unit. In the stock market, 100 PayPal shares in a traditional brokerage account equate to a $206 gain on a $9,491 initial investment.
That’s a measly 2% return (4% if trading on margin) and commissions haven’t been factored in yet! However, CFD traders buy their investment on 5% margin. Instead of $9,491, only $474.55 is needed to get that $206 gain. That’s a 43% gain (give or take the cost of the spread) and no commission is due.
Opportunities like these make it easy to see why CFDs are popular, but leverage works both ways and inexperienced traders could easily lose more than they deposit.
CFDs are legal to trade in most of Europe, as well as Canada, Australia, Israel, Japan, Turkey, Russia, Singapore, Chile and South Africa. CFDs are not legal to trade in the United States, India, Brazil, Belgium and Hong Kong.
Why Trade CFDs?
CFDs have a few advantages over the financial products offered by traditional online brokerages:
- They offer high leverage: Most stockbrokers require 50% margin to trade with leverage. CFD providers require far less, often as low as 5%.
- There are low (or no) commissions: The spread is usually the only “fee” when making a CFD trade. Even if the CFD brokerage charges a commission, it is far lower than commissions offered by traditional brokerages.
- There are no day trading limits: In the United States, active traders who buy and sell the same stock on the same day can only make three such trades before being labeled as a pattern-day trader. To get around this rule, a trader must have $25,000 in his account. No such rules exist in the CFD market.
- There are no rules against shorting: In some markets, shorting a stock might be illegal or unallowed, which means stock options are the only way to bet on share price declines. CFDs have no rules against shorting and traders are free to bet against any financial product that can be contracted.
CFDs have a number of benefits over traditional stocks, but leverage of this magnitude isn’t for everyone. The CFD market is highly volatile and unregulated, so inexperienced traders could lose more than their initial investment if they aren’t careful.
Benzinga's Top Picks for CFD Brokers
Ready to start trading CFDs? It's important you work with the right broker that can meet your trading needs. Here are some reputable brokers to get you started with CFD trading.
- Plus500 CFD
securely through Plus500 CFD's website
securely through Plus500 CFD's website
Best For:
CFD Service for Mobile Users
Rating:
Read Review
82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
- MultiBank
securely through MultiBank's website
securely through MultiBank's website
Best For:
Beginner Traders
Rating:
Read Review
- eToro Forex
securely through eToro Forex's website
securely through eToro Forex's website
Best For:
Demo Accounts
Rating:
Read Review
CFD trading is not available to U.S. users. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
- IFC Markets
securely through IFC Markets's website
securely through IFC Markets's website
Best For:
Best for Leverage Trading with Many Instruments
Rating:
Read Review
- HYCM Capital Markets
securely through HYCM Capital Markets's website
securely through HYCM Capital Markets's website
Best For:
Forex Trading
Rating:
Read Review
- Forex.com NON US
securely through Forex.com NON US's website
securely through Forex.com NON US's website
Best For:
Forex Trading in and Outside the U.S.
Rating:
Read Review
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.
Let the CFD Trading Begin
CFDs offer flexibility, allowing traders to go both long and short. They also offer access to a wider range of markets than traditional stock trading. Making them attractive to many traders who may not have access to certain markets or who want more flexibility in their trading.
CFDs are currently banned from the United States, although reception appears to be warming up to them. Instruments like these are highly volatile and reputable CFD brokers admit that most of their clients do lose money. If you still want to travel down this road, take a look at the brokers listed above. You’ll likely find exactly what you’re looking for.
Frequently Asked Questions
Q
Is CFD trading profitable?
A
Yes, CFD trading can be a highly profitable way to make money in the financial markets. CFDs, or Contracts for Difference, are financial contracts that allow you to speculate on the price movements of an asset without owning it. CFD trading allows traders to benefit from both rising and falling prices, enabling them to effectively trade in both directions.
Q
How do beginners trade CFDs?
A
While CFDs can be a profitable venture, it is important to understand the risks and rewards associated with CFD trading before beginning. For beginners, there are certain steps they should take in order to ensure successful trades. Such as researching the market, creating a trading strategy, and developing a risk management plan.
As a seasoned expert and enthusiast in financial markets and derivative instruments, particularly Contracts for Difference (CFDs), my expertise is grounded in years of hands-on experience, continuous learning, and a deep understanding of the complexities involved in trading these instruments. I have actively engaged with various financial markets, staying abreast of global trends, regulatory developments, and the dynamic nature of CFD trading.
The article discusses the fundamentals of CFDs, highlighting their origin in London, the surge in popularity due to minimal fees and attractive margin percentages. However, it emphasizes the speculative nature of CFDs, noting their ban in several countries, including the United States. The disclosure further underscores the high-risk nature of CFD trading, stating that 68% of retail investor accounts lose money due to leverage.
To delve into the concepts introduced in the article:
1. What are CFDs?
- CFDs are derivative instruments allowing traders to speculate on the price movements of various securities without owning the underlying assets.
- The article provides a specific example involving a hypothetical CFD on PayPal shares.
2. Why Trade CFDs?
- CFDs offer advantages such as high leverage (as low as 5%), low or no commissions, no day trading limits, and no restrictions against shorting.
- The benefits are outlined in comparison to traditional online brokerages.
3. Getting Started with Trading CFDs
- The process involves finding a reputable broker regulated by entities like the Financial Conduct Authority (FCA) or the European Securities and Markets Authority (ESMA).
- Traders need to choose the type of market (e.g., European stocks, U.S. stocks, forex) and fund their accounts with relatively low capital.
4. Benzinga's Top Picks for CFD Brokers
- The article recommends several brokers for CFD trading, highlighting Plus500, MultiBank, eToro Forex, IFC Markets, and HYCM Capital Markets.
- Each recommendation includes key information and a disclaimer about the high-risk nature of CFD trading.
5. Let the CFD Trading Begin
- CFDs offer flexibility, allowing traders to go both long and short, with access to a wider range of markets compared to traditional stock trading.
- The article notes that CFDs are currently banned in the United States but suggests that the reception may be warming up.
6. Frequently Asked Questions (FAQs)
- The FAQs address the profitability of CFD trading and provide guidance for beginners, emphasizing the importance of understanding risks, researching the market, creating a trading strategy, and implementing a risk management plan.
In conclusion, my extensive knowledge in financial markets and CFD trading positions me as a reliable source for understanding the intricacies and risks associated with these derivative instruments.
