Contracts for Difference (CFDs) is the buying
or selling of a share, index, commodity or currency pair. CFDs are
a leveraged product allowing you to potentially maximise returns
without having to deposit the full value of the contract you are
*Leveraged trading can be risky so always ensure you have a full
understanding of what you are trading, what moves your market and
whom you are trading CFDs with!
CFD trading differs from buying a physical position with a stock
broker - where the total value of the trade is required to be
deposited with the broker.
CFDs are a leveraged product allowing traders to deposit only a
small percentage of the total 'consideration'. For the bigger, more
liquid shares, brokers will sometimes require as little as 5% of
the total value allowing you to keep the remaining 95% in an
interest bearing account. This flexibility, combined with the fact
that this product does not incur Stamp Duty, has resulted in a
growing number of traditional share traders to move their business
into CFD's and this appears to be a trend that is likely to
continue for some years to come.
Read more on CFDs vs traditional share
Not all CFD brokers are offering the same service. Some will
offer a 'market-maker' service and others will offer what is known
as Direct Market Access (DMA).
The services available cover a wide range of value-added extras
that brokers and providers now offer. Competition for your business
is fierce and it's now no longer just about the commercial terms a
broker can offer, there have to be other incentives to encourage
new traders to open accounts.
Read more on
Opening a CFD trading account is relatively straightforward with
many companies offering an online application process. The majority
of new applicants choose to use the online method as many firms
will be able to process your application very quickly - allowing
successful applicants to gain access to the market almost
Demo accounts will allow you to get used to the trading platform
(and broker) before you commit to opening an account but some
brokers allow you to trade with real money but in very small size
so that you get used to trading with your hard-earned cash and to
the emotions that go with it!
View all CFD brokers offering demo
Direct Market Access (DMA)
Account types will differ across the various trading products
but the most important thing is to think about your requirements
before making a decision. CFD brokers can offer Direct Market
Access (DMA) accounts but it will cost you to receive this service
so consider whether you really need this before signing up.
Read more about Direct Market Access
The information required by the CFD Broker is fairly standard
although you will be expected to answer questions about your
knowledge and previous experience of trading.
Even if you have little or no experience of CFD trading it is
important that you answer these questions truthfully as it will
help the broker to correctly categorise you as a client.
All CFD brokers are FSA regulated and, as with other areas of
financial trading, have a duty of care to their customers to ensure
that the product is suitable for them. If the CFD broker decides
that the product is unsuitable for you they will notify you at the
time of your application with them.
Cost to trade CFDs
The costs to trade CFDs will vary depending on the provider you
decide to use but in general the two main charges are: 1) the
commission to place the trade, and 2) the cost to 'roll over' your
position each day you wish to keep it open.
Brokers calculate the commission and rolling costs by
multiplying the size of the trade by the price you trade at. For
example, if you are buying 10,000 shares of Vodafone at a price of
£1.70, your commission and rolling charges are calculated on a
'consideration' of £17,000 (10,000 x £1.70).
Below is a table of CFD brokers with a few key account-opening
criteria that we believe should be considered when you are deciding
which broker to open an account with. It's not always about price;
finding a broker that suits your style of trading and your
technical requirements is as, if not more, important than shaving a
few pence off of your dealing costs.