One of the most popular methods of trading foreign exchange and other financial assets in an online setting is through what is known as a Contract For Difference, or CFD. This instrument is not necessarily tradable through a typical exchange; instead, it is a deal between you and your broker where you speculate on the direction of prices for your chosen asset without ever having to buy the underlying asset. While that description might make it sound a bit like an option and there are indeed some similarities, there are also important differences to keep in mind.
In this article, you will learn more about this interesting way of trading; the history and evolution of CFDs, especially in the UK and beyond, where trading may be limited by local rules and regulations by the regulator at hand; how CFDs are regulated in the UK and when they are legal; and how to go about choosing a trusted broker for this trading medium. Finally, we will provide a table of the most trusted brokers in the UK for trading CFDs based on our thorough ongoing reviews, which we continually update from time to time.
What are CFDs?
In very basic terms, a CFD is a contractual agreement between a buyer and a seller regarding the change in value of an asset from the entry to exit point. CFDs are not new, having been used in professional quarters in the UK as early as 1974, but they were not introduced to retail traders until the 1990s. This form of financial derivative between a trader and a broker typically follows a market-maker model. No exchange is involved, but the contract stipulates how prices will be determined for valuation purposes. Spread-betting firms in the UK also offer CFD trading.
The allure of CFDs is that there is very little in the form of an initial investment required since the underlying asset does not need to be purchased. The funds at risk can appreciate greatly in a short period of time, which is another attractive feature, but they can depreciate as well. Leverage is possible, as are margin calls when the market moves against the trader. Leverage can magnify the value of gains, but it can also magnify the value of losses. CFDs differ from options in the sense that there is no expiry date, and you may lose more than the amount placed at risk.
Volatility can produce large swings in current valuations in either direction, which is a cause of concern for most major regulatory bodies that wish to protect consumers from highly risky forms of investment and trading. Studies from as recently as 2021 estimated that the average loss rate for CFDs was just over 74%. The Financial Control Authority (FCA) in the UK went a step further and pegged the average loss for a CFD client to be £2,200.
The high rate of loss and casualty rates from CFD trading have moved regulators to curb this form of trading in several jurisdictions. These curbs range from reduced leverage levels based on the risk of the underlying asset to total restrictions in some countries. Europe and the UK have been the most pronounced in their actions, whereas countries such as the United States and Hong Kong do not permit any trading of CFDs whatsoever.
Is CFD trading legal in the UK?
Yes, trading CFDs is legal in the UK, but the FCA has placed restrictions on their use, especially if you are not a professional trader or use leverage. In July of 2019, it set leverage levels of 30:1 for major currency pairs, and down to as low as 2:1 for other asset groupings. If margin requirements dip to 50%, the account must be closed and the broker must also provide negative-balance protection.
Trading incentives were also prohibited going forward, and each broker is now required to publish its CFD loss experience rating on its website, which is roughly 54% to 83% in most cases. In October of 2020, the FCA also banned retail traders from trading cryptocurrency CFDs due to the higher volatility of these assets and market abuse. CFDs gave traders the ability to short crypto assets, but the volatile nature of these assets still made the process risky.
Over the years, forex brokers have quickly adopted CFD trading and then expanded their portfolios to offer all manner of assets, including stocks, bonds, commodities, indices and precious metals. Originally, commissions were part of the formula, but the industry has evolved such that the only direct trading fees, for the most part, today are Bid/Ask spreads applied at both the opening and closing of a position.
It was not difficult for brokers to waive commissions since their revenues were also being bolstered by the “net” of client-traded positions. If clients are losing 74% of the time, brokers only need to worry about covering the winners on the opposite 26% side of the equation. Typically, these traders tend to be savvier, but if the broker effectively hedges its exposure in the market, there will be a significant positive impact on net revenues from the netting of these two factors.
Brokers generally do not acknowledge these net gains as revenue, but publicly traded firms must disclose the nature of their income sources, although not necessarily their proportionate amounts. On a positive note, CFDs may entail high risk but they can be profitable, too. Successful traders must develop winning strategies and test them out on free demo systems before putting real money on the line. Preparation and practice can lead to profitable CFD trading on a consistent basis.
Who regulates CFD trading in the UK?
The FCA has oversight responsibility for regulating CFD trading in the UK. Like many other major regulatory bodies across the globe, it has had to respond after the debacle related to binary options, sometimes referred to as digital options. Unwary investors lost billions of dollars from this unsavoury investment scheme. As a result, regulators have taken a dim view of any trading product with similar loss profiles. Casualty loss rates for binary options, which were aggressively marketed, exceeded 90%.
Both the FCA in the UK and the European Securities Markets Authority (ESMA) in Europe have subsequently developed strict regulations for brokers related to CFD trading. As noted above, leverage has been curtailed, trading incentives have been banished, and CFD trading of cryptos has been forbidden for retail traders in the UK. After Brexit, the FCA has also blocked several European brokers from offering CFDs in the UK as well. The agency has stated that it will continue to monitor the situation and protect the public interest accordingly.
How to choose a trusted CFD broker in the UK
The FCA highly recommends that traders only trade CFDs from local UK providers that conform to its safety rules and regulations. Since a CFD is a contract with your broker, there is a third-party risk, which increases greatly when you deal with an offshore broker. You will want to choose a trustworthy local broker with a great reputation and the services that you desire.
Your choice will depend on the products you wish to trade, prices that match your style of trading, and customer service and educational support that aligns with your needs as a trader. Finally, each of these brokers provides access to a free demo system for test purposes. Give each one a test ride to determine the platform that suits your tastes, gives you the information you need at your fingertips, and creates an acceptable user-friendly experience.
The most trusted CFD brokers in the UK
Since London is the global financial centre for the foreign exchange market, residents of the UK have a multitude of local brokers, both large and small, along with publicly traded and private entities from which to choose. All of these firms must conform to FCA guidelines. If a firm that offers bonuses or leverage beyond mandated UK limits solicits you, you have more than likely been approached by a foreign-based broker. Overseas brokers, as tempting as they may be, are often unsafe. Pressing your legal rights in a foreign jurisdiction is never an easy proposition.
Your best bet is to choose a local broker, especially one that is included in the following table. We have reviewed and tested these brokers, and each one has an excellent track record.
| Broker | Features | Min Deposit | EURUSD Spread | ||
|---|---|---|---|---|---|
 Your capital is at risk US Clients: No Regulated : Yes | – Flexible leverage up to 500:1 | $200 | From 0.1 | Sign Up Open Demo Account Read BlackBull Review | |
| Your capital is at risk US Clients: No Regulated : Yes | – 40% New Member Bonus | $100 | Fixed | Sign Up Europe* CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% 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. Open Demo Account Read AvaTrade 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 US Clients: No Regulated : Yes |
| 100GBP/AUD/EUR/USD | variable | Sign Up * 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 Open Demo Account Read Plus500 Review | |
| Between 74-89 % of retail investor accounts lose money when trading CFDs US Clients: No Regulated : Yes |
| $200 | NDD 0.09 / Standard 0.69 | Sign Up Between 74-89 % of retail investor accounts lose money when trading CFDs Open Demo Account Read Pepperstone Review | |
| Your capital is at risk US Clients: No Regulated : Yes |
| $5 | From 0.0 pips | Sign Up Open Demo Account Read XM Group Review | |
| 76% of CFD traders lose money US Clients: No Regulated : Yes |
| $50 (varying by Country) | from 1 | Sign Up 76% 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. Open Demo Account Read eToro Review | |
| Your capital is at risk US Clients: No Regulated : Yes | – CySEC, FCA, FSCA, SCB Regulated | $100 | Sign Up Open Demo Account Read FxPro Review | ||
| | |||||
CFD trading in the UK is legal, although certain restrictions may apply if you are not a professional trader or if you choose to use leverage. The FCA is the regulator setting these rules, and it has effectively separated itself from EU dictates promulgated by ESMA. Trading CFDs is high risk with high casualty losses, which is why the FCA has intervened so forcefully, limiting leverage, incentives, and access to cryptos.
Is CFD trading right for you? The answer to this question will depend on your personal motivations, how you prefer to trade, and whether the level of risk is acceptable to you. Retail traders can profit with CFDs – the 26% figure cited above is evidence of this fact – but you have to approach the market in a disciplined fashion. Only put real money at risk once you have tested your plan on a demo system, preferably one offered by one of the brokers we have listed.
