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
What is a CFD?
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.
How much money do I need to make a CFD trade?
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.
What is the spread?
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.
Can I lose more money than I deposit?
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.
What are points and pips?
Points are used to measure any market movement when CFD trading, with the exception of CFD forex, which uses pips. Find out more here.
How do I make a CFD trade?
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.