A contract for difference (CFD) is a way of trading on financial markets without owning the underlying asset you trade on.

Before you start trading, look at the following to find the best trading account:

  • The size of the spread: the smaller the better

  • The margin per trade

  • If you can trade on the market you want

Why is the spread important?

The spread is the difference between the sell and buy price on a trade. The bigger the spread, the more the market has to move in your favour before you can make a profit.

For example, if the sell/buy price on the FTSE 100 is 6800/6801 (one point spread), the market needs to move by more than one point in your favour to give you a profit.

When you compare CFD brokers, look for the smallest spread you can find on the market you want to trade on.

What does the margin do?

When you make a trade, you only need to have a small percentage of the total value of your trade in your account, this amount is the margin.

For example, a trade worth 100,000 and a margin of 0.1% only requires you to have 100 available in your account.

It also acts as a deposit, which means the CFD company can use it to cover any losses you make on a trade up to the amount of the margin.

However, when the margin is small, there is an increase to both the risk to your money and the potential for a higher profit. Find out more information on margins here.

What markets can you trade CFDs on?

You can use this comparison to see the spreads and margin offered on:

  • Indices, stock exchanges like the FTSE 100 and Wall Street

  • Forex, currency pairs like GDP/USD (pound/US dolllar) and EUR/USD (euro/US dollar)

Most companies let you CFD trade on many other markets, so check each one before opening an account.

CFD trading account FAQs

Q

What is a CFD?

A

A contract for difference (CFD) is a way of trading on financial markets without owning the underlying asset you trade with. Find out more here.

Q

How much money do I need to make a CFD trade?

A

It depends on the margin, as you can only make a trade if the amount in your account covers the margin needed for the trade. Find out more here.

Q

What is the spread?

A

It is the difference between the sell and buy price. The smaller the spread, the smaller the market movement needs to be before you make a profit.

Q

Can I lose more money than I deposit?

A

Yes, although your margin helps cover any losses you make, you could lose more that what is in your account. Here is more information on CFD trading.

Q

What are points and pips?

A

Points are used to measure any market movement when CFD trading, with the exception of CFD forex, which uses pips. Find out more here.

Q

How do I make a CFD trade?

A

After you choose a broker, go to their website and register for an account. When your account is open, here is how to make a CFD trade.