How to trade CFDs
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77% of retail CFD accounts lose money.
This guide is dedicated to the art of trading CFDs. Learn about the unique features of CFDs and the key factors that you should consider before buying one. If you aren’t familiar with what CFDs are or how they work, then you might want to start with our investing guide and CFD definition that goes through those questions in more detail before reading on.
Compare the best CFD trading platforms
Before you start trading, you need to sign up for a CFD broker that can execute your trades for you. Lots of platforms let you buy and sell CFDs, and you can get started with any of the options below simply by following the links in the table.
77% of retail CFD accounts lose money.
How to trade using CFDs – a step-by-step guide
The act of trading is relatively simple and it doesn’t take long to get to grips with. Follow this process in order to make your first trade.
- Sign up with a CFD broker. You need a broker in order to make trades. Each platform has its own unique features and you should choose one that most closely matches how – and what – you want to trade. You can compare their offerings by reading through our in-depth reviews.
- Set a budget. It’s best to decide on an amount which you are willing to lose in advance, so that you aren’t tempted to keep pouring money in if things go wrong. You can get started with a small amount of money, usually as little as the broker’s minimum deposit, which can be £50 or less.
- Create a trading strategy. CFDs allow you to buy or sell different assets (known as going ‘long’ or ‘short’), so you need to set up some rules to tell you when you should make a move, and which way. Most traders spend a lot of time analysing price charts to find patterns that help them decide when to buy or sell a CFD.
- Find an opportunity. You can trade CFDs on a range of assets, such as stocks, indices, commodities, currencies, and cryptocurrencies. Pick your market and then choose an individual CFD, based on the trading indicators you have set up or your own research.
- Open your position. Select the CFD and whether you want to buy or sell it. Then decide on a position size, set any stop-loss or limit orders (these are prices at which you want to automatically close the position in order to reduce the risk from extreme market moves), and execute the trade. Once you’ve done so it will show up in the ‘open positions’ section of your account.
What are CFDs?
They are contracts that represent a financial asset, such as an individual stock or cryptocurrency. Each CFD mimics the price of the asset that it represents, so they allow you to speculate on how the price might change without ever owning the asset itself.
This type of contract is known as a ‘derivative’, which just means that it gets its value from an underlying asset. Its price fluctuates in the same way, and it gives the trader the option to benefit from the changes by shorting them or using leverage, features which aren’t (normally) available when you buy the asset outright.
Key factors to consider
CFDs have some unique features that it’s worth looking out for when you start trading. Here is a quick look at the most important ones, along with some practical advice about what they mean for you.
Whether you want to go long or short
The terms ‘long’ and ‘short’ simply refer to buying and selling an asset, respectively. With CFDs you can do both, and the right approach depends on how you expect the price to move. If you go long (buy) and the price goes up, you make a profit based on the difference, and the reverse is true if you sell (short) and the price goes down.
This also means that you can use CFDs as part of a strategy based on regularly buying and selling assets as their price moves up and down, often over the course of a single day. In most cases, this strategy goes hand-in-hand with an analysis of price charts to find trends that indicate which way a price is likely to move.
Fees and spreads
Many brokers offer free trading on CFDs, but you might have to pay a fee or commission with others. Even if the trading is free, it’s likely that your broker makes its money in other ways. Often, it does so on the difference between the ‘buy’ and ‘sell’ price – known as the ‘spread’. The larger the gap between the two figures, the bigger the spread, and the bigger the broker’s cut. Compare the fees and spreads on different platforms to find the best value.
Whether to use leverage
Leverage is the practice of using a small amount of money as a deposit – referred to as ‘the margin’ – in order to open positions many times bigger. It’s very common when it comes to trading CFDs, and brokers may let you make trades up to 10x (or more) the value of your deposit.
It’s a risky strategy, as multiplying the size of your trade also increases your potential losses. Although many traders use it, think carefully before you join them, and consider whether it’s appropriate for the asset you’re interested in. Cryptocurrencies, for example, are much more volatile (and therefore risky) than the forex market, where it’s standard practice to open positions with lots of leverage because currency price fluctuations are so small.
Why use CFDs?
They are more flexible and have fewer limits than buying or selling assets outright. It’s usually cheaper to trade CFDs, so you can do so more often as part of a trading strategy that requires a lot of activity to make money, such as day-trading. They’re also easier to use, and you can simply sign up to a broker and make a trade in a few minutes.
Those factors have made them extremely popular as a trading tool, and they offer up many more ways to trade as well. As you can buy and sell CFDs, you can use them to speculate on price moves in either direction, and you can use leverage in order to afford assets that might otherwise be out of your reach, or to spread your money more widely.
This guide has been packed full of information so, to help you come to a final decision, here’s a quick summary of the pros and cons of CFD trading.
- They are a simple way to speculate on virtually any asset you want
- CFD trading is often free and you can make moves at any time of day
- You can buy and sell them in order to take advantage of price falls as well as rises
- CFD brokers let you use leverage to open bigger positions
Where can I learn more?
Here at Invezz, we have a range of content available to help you make better investment decisions. Our courses section includes extensive guides that take you through the basics of different investing terms, strategies, and how to use them in practice. You can see some of our most popular courses below:
Stock Markets 101
Long-term Stock Investing
Short-term Stock Trading
More investing & trading guides
Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >