CFD Trading In the UK – Complete Guide

CFD trading in the UK is a type of derivative trading. It was first developed by the Britishers in the 1990s. Jon Wood and Brian Keelan gave birth to CFD trading. CFD trading in the UK has become very popular in recent years. In this article, we will give you detailed information on what CFD trading in the UK is, how it works, and what are the pros and cons of CFD trading in the UK, make sure to stick with us until the very end of the article.

What is CFD trading? 

Buy and Sell-cfd trading

CFD trading stands for Contract for Difference, it is a form of derivatives trading. In CFD trading traders trade a contract instead of trading an asset directly. In CFD trading you do not have to own the underlying asset. In CFD trading, buyer and seller together execute a trade on an asset and decide that they will settle this trade on the basis of difference rather than settling it on the physical settlement over a certain period of time.

How does CFD trading in the UK works? 

Trading CFDs simply means that you are agreeing to exchange the difference in the value of an asset from the very point to which the contract is open to when it’s closed. 

CFDs trading allows you to speculate on the price movements on financial markets without owning any underlying assets.

For example, there is a buyer who predicted a rise in the value of the gold, and there is a seller who predicted a fall in the value of the gold. And, if the price rises are per the buyer’s prediction, traders will close their CFD position and settle the contract on the basis of the price difference in the profit. In CFD, the underlying asset is never owned by the trader, you can buy a share of that particular asset that is owned by a company or an organization that’s why CFDs are called derivatives. When trading CFDs in the UK you are allowed to trade CFDs on indices, commodities, shares, forex but except cryptocurrencies, as they are banned in the Uk.

Benefits of CFD trading in the UK

Leverage 

Leverage allows traders to open large deals with a relatively small investment. Therefore, CFD trading in the UK allows you to open a deal even when you don’t have a higher amount to do so. While CFD trading traders can borrow huge sums from the brokerage firm.

Delivery of assets isn’t needed

This is one of the major benefits of CFD trading. When you trade commodities like gold, wheat, rice, e.t.c you also need a place to store them or deliver them. However, CFD trading spares you from this burden as it allows you to trade without holding a place to store or deliver the particular asset. You don’t need to own a store or the products while CFD trading. 

Hedging 

CFD trading allows you to trade in large sections of financial instruments including commodities, Indices, Shares, cryptocurrencies e.t.c. It gives you various options to choose from. Therefore, to minimize the risk of loss hedging is used. It is a trading strategy that enables you to minimize the risk in trading by opening a position in a different market. It works as a shield when the market is against you.  

How to start CFD trading in the UK

Find a Brokerage Firm that suits you better

The very first step to start CFD trading is to find a Brokerage firm that has everything that you are looking for. Make sure to check whether the selected brokerage provides you the underlying asset you want to trade along with low spread and commission rates. 

Open an account 

Before you initiate CFD trading, make sure to open and use a demo account. This will help you practice the platform you have selected for CFD, test your trading strategy, and will help you decide which strategy suits you the best. 

Select an Asset 

Now that you have successfully selected the brokerage and practiced the platform the other thing you need to do now is to select the asset you want to trade. Every asset has its own pros and cons so choose carefully. For beginners, the most preferred and advisable pair is (USD/GBP) since it’s the most stable pair and for those who are willing to take risks, the pair GBP/JPY is advised. 

Use Stop Loss orders

Using stop-loss orders becomes a necessity because it helps in minimizing the risk involved. It is the price below the current market price of the CFD at which your broker will sell your position. If you set the stop loss feature then your broker will have to automatically sell the asset on your behalf when the value of your position drops.

Monitor Positions 

Analyzing the market, keeping an eye on what’s happening around in the market is what experts do so that they always stay updated and predict what’s going to happen with the value of the asset in the future. For analyzing the market there are many apps for mobiles from which you can choose from and if you are a desktop person then Bloomberg news will help you stay updated. 

Know when to close profits 

The most important factor in CFD trading is to know when you should close a position. Closing a position plays a very prominent role if your strategy is short-term and high frequency. 

How to choose the Right CFD Broker in the UK? 

CFD trading is not a piece of cake, it is highly risky but it can be highly profitable if the right strategies are applied. Therefore, we suggest you choose the brokerage platform that has a complete understanding of how it works. Following are the brokerage platforms that are the best and are filled with amazing features that we suggest you choose from.

Best Brokerage platforms for CFD trading in the UK 

IG Markets 

IG- CFD trading Brokerage

IG Markets is one of the most popular CFD brokers that ranks number one in our list and also ranks the top in the world’s largest CFD brokers list. It was founded in 1974 by Stuart wheeler. It is licensed and regulated by the Financial Conduct Authority and as well as by foreign financial regulators including the Australian Securities and Investment Commission (ASIC) and Germany’s Federal Financial Supervisory Authority (BaFin). 

It is packed with all the features which a reputed broker should have. It has a user-friendly interface that makes it easy to access even by beginners. It uses the latest encryption technology to safeguard its user’s data and funds.  

CFD Trading - IG Broker

Pros 

  • It is regulated by tier-one jurisdiction 
  • Offers more than 17,000 tradable instruments 
  • Provides MetaTrader 4 and L-2 Dealer 
  • Offers an abundance of research and educational tools 

Cons 

  • Offers high stock CFD charges

eToro

eToro- brokerage

eToro is one of the most popular CFD brokers, especially among newbies. This platform offers its users various asset options to trade with, including forex, ETFs, indices, commodities, stock, and bonds. What makes eToro stand in the industry is its unique social and copy features. The social feature is a feature that allows traders to interact with other CFD traders via a chat group. The copy feature is a feature that allows traders to copy trades from the experts so that its users are always at higher chances of making profits. The eToro platform is very easy to use and is a commission-free platform that offers the lowest spreads in the industry. The account creation on this platform is very easy and can be completed in a few minutes only. For the convenience of its users, this platform offers various modes of payment to make a minimum deposit of £150. However, it charges a minimal amount of £5 on every withdrawal, which is pretty reasonable.

Before you invest in this platform, you are advised to check whether this platform is right for you or not by using its free demo account feature.

CFD Trading - eToro Broker

Pros 

  • Compatible with every device
  • It is licensed and regulated by FCA 
  • Transparent platform 
  • Do not charge commission on stocks with a competitive spread
  • Offers unique social and copy feature 

Cons 

  • Offers limited educational and research tools
  • Charges £5 withdrawal fees

Plus500

Plus 500

Plus 500 is a CFD broker that is Israeli-based and was founded in 2008. Just like the above-mentioned brokers this platform also offers various tradable assets options including stocks, forex, and commodities. The account creation process on this platform is way too easy, to start investing in this platform you are required to make a minimum deposit of £100. Unlike other platforms, this platform has limits on withdrawals, and if that limit is exceeded then the platform charges additional fees. This trading platform is compatible with every device and also offers its own CFD trading mobile application. With the help of this application, you can monitor your trades at any hour of the day from anywhere.

Before you invest in this platform, you should use its free demo account feature to know whether this platform is right for you or not.

CFD Trading - Plus500 Broker

Pros 

  • Compatible with every device 
  • User-friendly interface 
  • Charges 0 percent commission 
  • Offers a variety of tradable assets 

Cons 

  • Offers limited educational and research tools.

City Index 

City Index

City Index is the most famous brokerage platform that offers trading instruments of more than 12,000 with over 150,000 investors globally. The account creation on this platform is simple and fast and the platform is regulated by tier-one authorities, including FCA (Financial Conduct Authority) and the ASIC (Australian Securities and Exchange Commission). This platform is fully automated and still customizable to suit every kind of trader. This brokerage platform charges commission and spreads to earn profits, which starts from as low as 0.5 pips and the commission depends on the market instruments. And, this platform also charges a financing cost when a leveraged position is held overnight. This platform offers you many tools so that you analyze the market and decide if the platform is perfect for you or not. Moreover, it offers a free demo account so that you can test the platform without investing in any real money and know whether or not you should choose this brokerage or not. 

CFD Trading - City index Broker

Pros

  • Customizable platform
  • It is regulated by tier-one authorities
  • Fully automated and customizable platform 
  • Offers competitive spreads

Cons 

  • Offers high stock CFD charges 

Pros and Cons of CFD trading in the UK 

Pros 

  • With CFDs you can diversify your trading portfolio as it offers you a variety of tradable instruments to choose from, including forex, commodities, indices, and many more. Therefore, it can be a great option for those who wish to trade in all markets because these trading instruments can be hedged. It is a trading strategy that allows traders to minimize the risk of a trade by opening a position in another market, so that you are at a safe position if the market swings against you. 
  • CFDs trading is the trading which allows you to earn profits even if the price decreases, which is the exact opposite of the classic “buy low, sell high scenarios”. 
  • CFDs trading in the UK allow traders to open a trading position in the market even if you don’t have enough money to hold that asset. In CFDs trading you can borrow funds from the brokerage firms and the results of the trade is multiplied. So, if the trade is successful you will enjoy increased profits. 
  • The best part of CFDs trading is that to start trading in this sector you don’t need to own a store to hold the asset or you don’t need to worry about the delivery of the asset. It allows you to trade without owning the underlying asset. For example, commodities like gold, wheat, rice, oil need to be stored or delivered. However, In CFDs, you can buy these commodities as ‘unallocated’. Simply put, you can hold a share of a particular asset that is owned by an organisation or a company, having the same financial impact as a CFD as the value comes when you sell the asset and set a deal of making profit or loss on the basis of the difference in the price. 

Cons  

  • CFDs are highly risky. Hence, it is for those who are mentally prepared and understand the possibility of losing. Only, if you are willing to take risk only then dive into CFDs trading. 
  • Unlike Spread betting which is considered as gambaling and therefore is not required to pay tax on its capital gains, CFD trading is regulated by the FCA,  and hence considered as a Financial instrument that is sold for the purposes of earning profits and are therefore according to the financial laws of the UK, is subjected to capital gains in the tax. 
  • CFD trading allows you to diversify your trading portfolio by investing in different assets. However, when trading CFDs in the UK, you cannot choose cryptocurrencies since all the derivatives of digital coins are banned in the UK. Cryptocurrencies in the UK are banned by FCA because of the volatile nature it possesses to protect the retail traders. 

Things to consider for CFD trading in the UK

  • You probably have heard about practice makes a man perfect, that same thing implies here also. The more practice the more you will improve. All you need to consider while CFD trading is to know what strategy suits you better and once you know your strategy and style stick to it. 
  • Keeping note of your trades like your trading entry, position size, exit points can be very beneficial for you. It is always advised to keep a note of your strategies, trades, and justification for your trade so that you remain rationalized. 
  • It is always advised to never skip setting stop loss and take profit orders so that your trade gets automatically closed whenever it reaches the desired price. Setting these help you in keeping emotions out of your trading which can ruin everything for you.  
  • Knowledge is the key to success. It is very important to stay updated and learn whatever you can while CFD trading in the UK. To do so, you don’t have to pick a certain trading course, all the information is available on the internet. Make sure to read blogs and watch YouTube videos to gain maximum knowledge about CFD trading in the UK. 

Best CFD Trading Strategies in the UK 

Following are the best CFD trading strategies :

Momentum Trading 

Momentum trading

Momentum trading is the most suitable trading strategy for beginners. In this strategy, all you have to do is to keep an eye on the stock or an asset that is speedily gaining value on strong volume. The more the traders, the more briefly the price will rise up and the moment the momentum of the asset or stock starts dragging its feet, sell your position right away to realize a profit. You can stay updated with what share CFDs you should watch by staying updated with the market news. 

Scalping

This trading strategy requires a lot more focus and patience. Not everyone can use this strategy. These trades are opened and closed within a few minutes only. The goal of the scalping strategy is to make a profit on the small movements of an asset that happen throughout the day.

Breakout  Trading 

This trading strategy simply means to buy when the market moves in your intended direction. However, in this trading, you need to avoid being fooled by false breaks. 

Wrap Up 

CFDs Trading in the UK is risky but has the potential to create profits for you if you are smart enough to play with the right strategies. Moreover, it is highly beneficial for the fact that CFDs offer you indirect ownership, which means, you can own an asset without owning the ownership of the underlying asset. That is something big if you want to trade commodities like wheat, crude oil, or rice. Because you cannot trade these when you don’t have a place to store or transport facility for delivery. But, with the help of CFDs, you don’t have to burden yourself with such tasks. In CFDs trading, you own a contract instead of owning physical barrels. 

Therefore, if you want to start CFDs trading in the UK do it right away and before you invest in your real money you are again advised to test whether it is for you or not by using free demo account features from the above-mentioned brokerage platforms.

FAQs

  1. Is CFD trading legal in the UK? 

Yes, CFD trading in the UK is one hundred percent legal and even getting more popular with each passing day. 

  1. Is CFD trading in the UK available on cryptocurrencies? 

No, unfortunately, it is not available on cryptocurrencies since cryptos are banned by the FCA. 

However, CFDs in the UK are available on most of the other assets, like commodities, indices, forex, shares, and stocks. 

  1. Is CFD trading risky? 

Yes, Trading is all about taking risks and CFD trading is always at high risk. Therefore, beginners are again and again advised to start CFD trading only after practicing it by opening a demo account.

  1. Are CFDs regulated in the UK?

Yes, CFDs are regulated in the UK by the UK’s Financial Conduct Authority (FCA). 

  1. Is there Tax imposed on CFD trading in the UK? 

Yes, unfortunately, CFD trading in the UK is not tax-free.

  1. Is CFD trading right for me? 

It totally depends on whether or not you are ready to take risks. If you are someone who is willing to take risks by trading in rising or falling markets then yes, this is the right place for you. 

  1. What can you trade with CFDs in the UK? 

CFDs in the UK give you exposure to trade on a lot more trading assets. Following are those financial instruments – 

  • Forex 
  • Stock 
  • Indices 
  • Commodities 
  • Bonds 
  1. Is there any CFD trading course? 

Yes, there are a number of courses by top CFD brokers in the Uk that you can enroll yourself in. However, if you don’t have time to learn a course or if you cannot afford it then don’t worry as the internet is filled with everything you need to know about CFD trading, make sure to read blogs and watch YouTube.