By trading CFDs (Contracts for Difference), a trader can access a diverse range of financial markets.
They offer opportunities to speculate on the price movement of an asset without owning the underlying asset.
Whether you’re interested in trading shares, indices, currencies, commodities, or cryptocurrencies, CFDs offer a flexible and accessible way to participate in many global financial markets.
In this guide to trading CFDs, we’ll explore in depth what CFDs are available to retail traders, and how to start trading CFDs.
What are CFDs in trading?
CFDs (Contracts for Difference) are a financial product (a derivative) that enable you to speculate on the price movements of various assets without actually owning the underlying asset.
This means you can buy and sell them through your online broker, without actually owning the stock or commodity or currency you may be trading.
How does CFD trading work?
When you trade a CFD, you’re agreeing to exchange the difference in the price of an asset from the time you open the contract to the time you close it.
Online CFD trading allows you to profit from price movements in the underlying market, without owning the asset itself.
For example, if you trade a gold CFD, the price of that CFD will go up and down just as if you were trading physical gold on a spot market.
The history of CFDs
CFDs were developed in the UK as early as 1974.
They were used for hedging purposes, to offset the risk from trading stocks on the London Stock Exchange. They gained popularity throughout the 1980s.
However, at first they were only available to institutional traders such as hedge funds.
CFDs became popular due to the leverage available, and because they were exempt from stamp duty in the UK.
They were first offered to retail traders in the UK in the late 1990’s, and since that time have grown exponentially in popularity.
Introduced to Australia in 2002, they are now available in most European countries, as well as in Canada, Israel, Japan, Singapore, South Africa, New Zealand and many other Asian nations.
However, they are not permitted in some countries such as the US, where the Securities and Exchange Commission (SEC) prohibits them.
What are the advantages of CFD trading?
There are many advantages to CFD trading. These include:
1. Price speculation without ownership:
When you trade a CFD, you’re agreeing to exchange the difference in the price of an asset from the time you open the position to the time you close it.
This allows you to profit from price movements without owning the asset itself.
2. Leverage:
CFD trading often involves using leverage, meaning you can control a larger position in the market with a smaller amount of capital.
This amplifies both potential profits and potential losses.
3. Long or short positions:
You can take a long position if you believe the price of the asset will rise. Or, you can take a short position if you think the price will fall.
This gives you the flexibility to profit in both rising and falling markets.
What is forex CFD trading?
Forex trading is a form of CFD trading and shares many of the benefits of standard CFDs, such as the use of leverage.
FX trading has boomed around the world in the past decade, and the daily forex market now has a volume of US $7.5 trillion daily!
(Figures correct as of October 2024.)
What can you trade using CFDs?
Broadly, the instruments available to trade using CFDs include:
- Forex (including major, minor and exotic pairs)
- Indices (such as the S&P 500, ASX 200, Nikkei 225 and FTSE 100)
- Metals (such as gold and silver)
- Other commodities (such as oil, natural gas, cocoa, coffee, corn, cotton and wheat)
- Cryptocurrencies (such as Bitcoin, Ethereum, Ripple and Dogecoin)
- Exchange-Traded Funds (offered by some online brokers, but not all)
- Shares (in major companies such as Apple, Amazon, Facebook, Tesla etc)
Here is a detailed explanation of what these different financial instruments are, and what they offer:
Forex CFDs
Foreign exchange currency trading (forex or FX) involves the exchange of one currency for another, with the aim of profiting from fluctuations in the exchange rate between the two.
As the price of world currencies constantly change, traders seek to capitalise on these changes, making forex the largest and most liquid financial market globally.
Daily forex trading is far bigger than any share market in the world, with an estimated $7.5 trillion in currencies exchanged every day.
To put this into perspective, the New York Stock Exchange trades a volume of around $200 billion each day. So, forex trading is very big business.
Retail traders account for only a tiny percentage (less than 5%) of overall forex trading.
What are currency pairs?
Currency ‘pairs,’ as they are known, represent the value of one currency compared to another.
Currencies are identified by a three-letter code, known as the ISO currency code.
For example, AUD stands for Australian Dollar, and CAD stands for Canadian dollar, so AUD/CAD means the Australian dollar versus the Canadian dollar.
Forex trading involves buying and selling these currency pairs simultaneously, hopefully benefiting from the change in the exchange rate that has taken place in the time between your purchase and your sale.
Most beginner traders start off trading the most popular pairs of currencies, which are known as the ‘majors.’ The major currency pairs include:
- EUR/USD: Euro/US dollar
- USD/JPY: US dollar/Japanese yen
- GBP/USD: British pound/US dollar
- USD/CHF: US dollar/Swiss franc
- USD/CAD: US dollar/Canadian dollar
- AUD/USD: Australian dollar/US dollar
- NZD/USD: New Zealand dollar/US dollar
Pros and cons of forex
Pros:
- High liquidity: The forex market is the most liquid financial market globally, ensuring ease of entry and exit.
- High intra-day volatility: The high volatility of currency pairs makes them an attractive option for short-term traders.
- 24/5.5 market: Forex trading operates around the clock from Monday to Friday, providing flexibility for traders in different time zones.
- Easy to go long or short: It’s easy to take either long or short positions when trading forex.
- Diverse opportunities: A wide range of currency pairs allows for diverse trading strategies.
- Low costs: Forex CFDs are low cost, with spread and commissions only a small fraction of the value of the trade.
- Leverage: The high leverage available on forex allows for efficient use of capital and can increase profits if used wisely.
- Suits technical analysis: Given its continuous nature and huge size, technical analysis can successfully be applied to the forex market.
Cons:
- Leverage: Leverage is a double-edged sword and can lead to greater losses if not used carefully.
- High volatility: While volatility can present opportunities, it also increases the risk of significant losses.
- Complex factors affecting prices: Currency prices are influenced by a wide range of economic and geopolitical factors.
- Overtrading due to accessibility: The easy accessibility and fast-paced nature of forex trading can tempt traders to overtrade, leading to excessive risk-taking and potential losses.
Indices CFDs
An index (plural indices) is a financial benchmark which represents a ‘basket’ or collection of shares from a particular market, providing a snapshot of overall market performance.
For example, the ASX 200 is an index which represents the value of the top 200 companies on the Australian Securities Exchange.
Trading indices allows investors to speculate on broader market movement, rather than concentrate on individual shares.
The most well-known indices are the Dow Jones Industrial Average, often called the Dow, the S&P 500, the NASDAQ Composite, and the FTSE 100.
The pros and cons of indices CFDs
Pros:
- 24/5.5 markets: It is possible to trade indices for nearly 24-hours a day.
- Lower Costs: CFD indices have minimal fees and commissions compared to individual share transactions.
- Diversification: Trading indices provides exposure to a basket of shares all grouped together, spreading the risk in comparison to trading individual shares.
- Ease of shorting: Indices offer a convenient and easy way to take short positions, compared to traditional share trading.
- Accessibility: Indices offer a simple and convenient way to access specific markets without in-depth research on individual companies.
- Useful for hedging purposes: Indices can be used for hedging purposes to offset risk in a share portfolio.
Cons:
- Limited impact of company-specific news: Indices are influenced by overall market conditions, limiting the impact of company-specific news.
- Limited upside potential: While diversified, indices may limit gains compared to potentially outperforming individual shares.
- Overnight finance: If you are long an indices CFD you will pay overnight financing fees (and receive dividends). If you are short indices, you may receive interest overnight but you will be liable for any dividends.
Commodity CFDs
Commodity trading includes buying and selling tangible goods like base metals including gold and silver, gas and oil, or agricultural products such as sugar and wheat.
Trading commodities involves speculating on their future price movement, but does not involve actually owning the commodities in the practical sense.
This market is strongly influenced by factors such as global demand, geopolitical events, and natural disasters.
Commodities are either traded on their spot price, which means the price which exists in today’s market, or on future prices.
Here are some of the most popular commodity markets amongst traders.
Spot commodities:
- BRENTcash
- UK Oil/spot
- Natural Gas/spot
- WTIcash
- US Oil/spot
- Sugar
- Wheat
- US Oil
Metals:
- Aluminium
- Copper
- Silver troy ounce
- Gold troy ounce
- Platinum troy ounce
- Zinc
The pros and cons of commodity trading:
Pros:
- Price volatility: Commodities markets can experience significant price volatility, influenced by various factors such as global demand, geopolitical events, and weather conditions. This can be of benefit to traders looking for some to benefit from rapid price movements.
- Flexible trading schedules: Many commodity markets are open 24/5.5, which allows traders to fit them to their trading schedule.
- High liquidity: Easily enter and exit positions due to the high trading volume in major commodities.
- Flexible position sizes: CFD commodities can be traded at much smaller sizes than commodity future contracts. This makes it easier for you to customise your trades to match your risk tolerance. It also means that less capital is required to get started.
- Low trading costs: Compared to trading futures contract for commodities, CFDs often have lower trading costs.
- Ease of shorting: Commodity CFDs offer the opportunity to easily take short positions.
- No expiry: Cash CFD contracts do not expire, unlike futures contracts.
Cons:
- Market sensitivity to economic conditions: Commodities are often sensitive to broad economic conditions, including changes in interest rates, inflation rates, and overall economic growth.
- Limited dividends: Unlike share CFDs, commodities generally don’t offer dividends, limiting your income potential and overall return compared to holding the underlying asset.
- Overnight fees: Holding any CFD position overnight incurs financing charges, impacting your potential profit. Note, if you are short the CFD, then you may get paid interest. This depends upon the interest rates at the time.
Commodities can be day traded, or they can be used by traders with a longer-term outlook, holding open positions for days or even weeks to capitalise on a particular trend direction.
Cryptocurrency CFDs
Cryptocurrencies are digital or virtual currencies that use cryptography for security.
The most well-known is Bitcoin, but there are many others including Binance, Cardana, Dogecoin, Polkadot, Ethereum and Link, to name just a few.
Cryptocurrency trading involves speculating on their price movement compared to each other, the US Dollar or other established currencies such as the Euro.
You can trade more than 30 different cryptocurrency combinations, although you should remember that you don’t actually own the unit of bitcoin, just the right to buy and sell it.
The pros and cons of cryptocurrency trading:
Pros:
- 24/7 market: Cryptocurrency markets operate 24/7, providing constant trading opportunities
- Short selling: Profit from downtrends by going short, unlike direct crypto ownership.
- Potentially lower fees: CFD fees might be lower than exchange fees for direct crypto purchases.
- No need for a crypto wallet: By trading Cryptocurrencies as CFD’s you avoid the risks and complexities associated with setting up and securing a crypto wallet.
- Trade multiple assets from one account: Manage your trading portfolio easily through a single platform, unlike a crypto wallet.
- Leverage: Unlike cash cryptocurrencies, Crypto CFDs can easily be traded using leverage
Cons:
- Leverage: In fast-moving cryptocurrencies, leverage can be dangerous if not used carefully.
- Volatility and risk: Cryptocurrency prices can be highly volatile, leading to rapid and unpredictable price changes.
- Regulatory uncertainty: The regulatory landscape for cryptocurrencies is still evolving, creating uncertainty for traders into the future.
- No ownership: You don’t own the underlying crypto, missing potential benefits like staking rewards or future airdrops.
- Overnight fees: Holding CFD positions overnight incurs financing charges, affecting your potential profit.
- Trading experience required: CFDs for cryptocurrencies are complex instruments, and extensive knowledge of crypto and CFD trading is crucial.
Lack of range of markets: Smaller cryptocurrencies may not be available as CFDs
ETF CFDs
ETFs (exchange traded funds) are investment funds that trade on share exchanges.
They group together similar assets like shares, bonds, or commodities, and allow traders to gain exposure to a variety of related financial assets packaged together into one tradable unit.
ETF trading through CFDs offers a flexible and cost-effective way to gain exposure to a variety of different markets.
One popular example of an ETF CFD is trading the S&P 500 through the SPDR S&P 500 ETF Trust (SPY) CFD.
The pros and cons of ETF CFDs:
Pros:
- Diversification: ETFs offer exposure to a variety of grouped assets, providing instant diversification and less specific risk for investors.
- Lower fees: ETFs typically have lower management fees compared to actively managed funds.
- Liquidity and intraday trading opportunities: ETFs can be bought and sold throughout the trading day just like individual shares can.
Cons:
- Passive management: Some ETFs passively track an index, limiting the potential for outperformance.
- Market tracking limitations: The performance of an ETF is tied to the underlying index, potentially limiting gains and restricting volatility.
- Liquidity issues: While many popular ETFs are highly liquid, some niche or less-traded ETFs may face liquidity challenges, which makes it harder for a trader to exit a position.
Liquidity and slippage
- Liquidity refers to the ease with which an asset can be quickly bought or sold in the market without significantly impacting its price
- A liquidity ‘challenge’ means that when you want to sell the asset you’ve bought, there are no buyers available wanting to buy the asset at the price you are offering, so you’re not able to exit the trade at the price you’d planned.
- This will result in what is termed ‘slippage’ when you exit the trade at a different price than you specified
- Slippage can be negative (when you get a worse price than you specified) or positive (when you get a better price than you specified)
Share CFDs
Shares, also known as stocks or equities, represent ownership in a particular company.
When you buy company shares, you usually become a partial owner of the company, and are entitled to voting rights.
You will receive dividends from profits made by the company.
Trading shares involves buying and selling these ownership rights.
However, when you trade share CFDs, you don’t actually own the physical shares in the company.
Rather, you are simply making a profit or loss depending if the price of the stock CFD moves in your favour or not.
The pros and cons of share trading:
Pros:
- Ability to use leverage: By trading share CFDs you magnify your potential gains with smaller capital outlay, but be aware of the amplified risk of losses, too.
- Dividends: Share CFDs pay dividends, which can help to increase the profitability of trading shares.
- Company performance impact: Price direction can be directly correlated to a company’s performance, allowing for in-depth analysis.
- Market transparency: The underlying shares are traded on regulated exchanges, ensuring transparency in pricing.
- Low costs: Compared to trading shares outright, the cost of trading share CFDs can be much lower.
- Shorting: You can easily short share CFDs compared to traditional shares. Longer-term investors who hold a share portfolio may short CFDs to protect their share portfolio from losses. This is called hedging.
Cons:
- Individual company risk: Shares are subject to the performance of individual companies, exposing traders to specific business risks.
- Liquidity: Compared to other markets such as forex, shares can be illiquid, meaning it can be difficult to exit and enter trades, in particular if trading a large size.
- Overnight risk: Share exchanges close at the end of the trading day. This means that positions can be subject to gapping. This means a trader could end up losing more than they planned on a trade, if it gaps through their stop-loss.
- Negative dividend risk: Trading share CFDs in the short direction can expose the trader to negative dividend risk. This means if you hold the share CFD on dividend day, and you have traded a short position, then you are liable to pay the entire dividend amount for each CFD you hold.
- Overnight holding costs: Fees are charged for holding CFD positions open overnight, increasing the cost of trading.
- No voting rights: If you hold the CFD for a share, you don’t own the share outright so you don’t have voting rights.
How to start trading CFDs
Getting started with CFD trading is quite simple.
Anyone with a computer and internet connection can start to trade CFDS.
However, mastering the skills required for long-term success takes dedication, effort, and practice.
Here are the essential steps on how to start trading CFDs:
1. Learn the fundamentals of CFD trading:
Before entering the market, it’s crucial to understand what CFDs are, and how they work.
You’ll need to familiarise yourself with key concepts such as leverage, margin, risk management, and how to read trading charts.
Having a solid grasp of the basics will give you a strong foundation for your trading journey.
2. Choose a charting platform:
To trade CFDs effectively, you’ll need a reliable charting tool to track price movements and identify potential trades.
There are many charting platforms available for traders. At MarketMates, we prefer TradingView due to its user-friendly interface and powerful analytical tools.
3. Select a CFD broker:
Choosing the right broker is vital. Make sure to pick a CFD broker that offers competitive spreads, low fees, and a stable trading platform.
At MarketMates, we offer a subscription-based trading model, meaning you can trade CFDs with unlimited access for a fixed monthly fee, without additional per-trade costs.
We also provide a FREE plan for beginners, allowing you to trade without monthly fees or hidden charges.
4. Open and fund your trading account:
Once you’ve selected your broker, the next step is to open and fund your trading account.
Only deposit money that you are willing to risk. Never trade with money set aside for essential expenses like your mortgage, rent or groceries.
5. Develop a trading strategy:
Create a comprehensive trading plan that includes your goals, risk tolerance, and preferred CFD trading strategy.
A detailed trading plan will guide your decision-making and help you stay disciplined.
6. Practice on a demo account:
Before risking real money, start with a demo account.
This lets you practice CFD trading and test your trading strategy in a simulated environment without any financial risk.
7. Begin trading with real money:
When you feel comfortable and confident in your trading skills, you can start trading CFDs with real funds.
Start small and gradually increase your trade sizes as you gain more experience and build confidence.
8. Continuously review and improve:
CFD trading is a continuous learning process.
Regularly review your trades and adjust your strategy as needed.
Even experienced traders are always learning new ways to improve their performance.
Here at MarketMates, Sam Eder and I have over 30 years of combined experience, but we continue to refine our trading strategies and adapt to changing market conditions.
By following these steps, you can confidently begin your journey in CFD trading, and start to develop the skills necessary to succeed over the long term.
Final thought on trading CFDs
CFDs are a flexible and convenient way to trade a variety of markets, all from one account.
Rather than having to open several different accounts for different types of trading, such as crypto and FX, you can do it all from one account using CFDs.
They also offer the convenience of leverage, allowing you to take larger positions, and so potentially magnify your profits.
However, by using leverage, there are also magnified risks that you need to be aware of and understand before you start trading.
We’re here to help
CFDs are an exciting and cost-efficient way to trade. They open up a new world of trading opportunities, with access to a large variety of markets.
Now it’s up to you to decide which type of CFDs would suit your personality, and preferences and trading style.
Here you can find out more about MarketMates’ subscription-based trading.
Till next time, happy trading!
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Sources
Marketmates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
- Investopedia – Commodities Trading: An Overview https://www.investopedia.com/investing/commodities-trading-overview/
- Gold – World Gold Council https://www.gold.org/gold-market-structure/global-gold-market
- London Stock Exchange – https://www.londonstockexchange.com
