If you are thinking about CFD trading, you may well have a need for more information. Is CFD trading the right choice for you? Which CFD brokers are best, and how do you check they’re legitimate? Will CFD trading provide a tax advantage for you? Today we’ll look at all these issues and help you make the right choices as you start your CFD trading journey. We will begin with an important question. What exactly are CFDs, and how do they work?
What Are CFDs?
CFD is an acronym for contract for difference, and trading using CFDs is a way of speculating on the price of an asset without ever actually owning the asset. Using CFDs, you can trade various assets, such as forex or shares. A CFD is a financial derivative product that pays the difference in the settlement price between a trade’s opening and closing price.
CFD trading is popular in many countries and across many markets. Although it is probably most used by forex traders, it is possible to find CFD brokers that offer commodities, stocks and shares, indices and even cryptocurrencies. Most traders use leverage when trading CFDs, which allows you to use much more capital than you have on deposit in your trading account. Some brokers offer CFD trading alongside other types of trading or offer CFDs when trading certain asset classes but not others.
The amount of leverage you are offered and the assets on offer as CFDs will depend on the broker you choose. You should use all the same precautions when choosing a CFD broker as you would when selecting any broker for any kind of trading. Be aware that CFD trading is inherently high-risk, and reputable CFD brokers in the UK generally carry a risk warning stating how likely you are to make money from CFD trading if you use their brokerage.
Are CFDs Safe?
While CFDs are aimed at traders with a high appetite for risk, there is nothing unsafe about trading CFDs, compared to other assets, as long as you pick a safe, regulated CFD broker. To trade CFDs safely in the UK, you should look for a reputable broker licensed and regulated by the Financial Conduct Authority (FCA). All brokers based in the UK or with a substantial presence in the country should operate under the authority of the FCA.
The FCA monitors brokers to ensure they meet specific standards and follow best practices. For example, in the UK and most other European countries, brokers are only allowed to offer leverage of up to 1:30. That is because the higher the leverage, the bigger the risk for the trader. You will see unregulated, offshore brokers offering much higher leverage levels, sometimes up to 1:500, and these brokers may accept UK traders. However, the FCA does not allow this level of leverage to be offered if the broker is based in the UK.
Be aware that the leverage offered may differ for different asset classes and even for other instruments within those classes. The leverage will vary between forex pairs, with higher leverage usually offered on major pairs and lower levels for trading minor and exotic pairs. A reputable broker will provide the appropriate level of leverage for the type of CFD being traded.
All forms of trading carry risks, of course, so if you are going to trade CFDs, you should do so as safely as possible by carefully educating yourself regarding CFD trading. It would help if you employed sound risk management strategies, trading discipline, and trade with lower leverage levels, especially when starting.
If you are new to CFD trading, you may want to start with a demo account that allows you to practice trading before investing any real money. We’d also advise you to pick a broker with a good education and training portal, as this will allow you to learn about all the risks involved and the various strategies you can put in place to mitigate them before you start trading.
The Benefits of Trading CFDs in the UK
If you choose to trade CFDs, there are several advantages, some of which apply specifically to traders in the UK and some that are more general. Some general benefits of CFDs include being able to stretch your capital much further, as you have access to the underlying asset at a potentially much lower cost than buying it outright. That is because you can use leverage to trade a higher volume than your actual deposit would allow. CFD trading at a reputable brokerage also usually comes with easy execution, access to a good range of markets and instruments, the ability to go long or short, and the ability to hedge.
When CFD trading, UK clients also have access to more specific benefits, including certain tax advantages. Any profits from CFD trades are generally exempt from stamp duty in the UK, although depending on your circumstances, you may have to pay capital gains tax on those profits. You will need to be aware that if you are resident in the UK but pay tax elsewhere, you may still have to declare those profits and potentially pay tax on them. The same may be true if you are a UK citizen living in another country.
Ultimately, traders should always consider consulting a tax professional to ensure they are correctly declaring their trading profits. Still, CFD trading in the UK can certainly be a tax-efficient way of investing for some traders.
Another significant benefit of trading CFDs in the UK is the strict regulation offered by the FCA. If the broker is in the UK, it will, or should be, regulated by the FCA. If you come across any broker or individual offering CFD trading that is not regulated, you should report this to the FCA, as they are probably operating illegally.
This also means you have an independent body to complain to if you have a problem with the broker that they are unwilling to resolve. You can lodge a complaint against a broker with the FCA, and if it is legitimate, they will investigate it and advise you what to do next.
How to Choose a Safe CFD Broker in the UK
Choosing a CFD broker in the UK should not be too hard, as plenty are available. It is just important to check they are legitimate brokers who are fully regulated. Check the FCA regulates the broker by going direct to the FCA website and ensuring the broker is listed there.
Be very careful to check that all the details on the FCA site match the information on the broker site. This is necessary as unscrupulous scam brokers sometimes purposely imitate, or even illegally clone, the site of a legitimate broker to deceive potential traders into believing they are trustworthy.
To make sure you pick the best CFD broker for your needs, you will also want to look at some reviews and check that there are no complaints that the broker is scamming customers. You can search online to see what customers say about any particular CFD broker. Just be aware that not all customer reviews are genuine. Some traders sign up as affiliates with brokerages and earn a referral fee for sending new customers there, so be wary if someone seems to be pressuring you to use a particular broker.
The Safest CFD Brokers in the UK
Here at ForexFraud.com, we regularly check and review CFD brokers to ensure they are legitimate and provide safe and fair-trading conditions. Here is a table of our currently recommended CFD brokers in the UK.
|Broker||Features||Min Deposit||EURUSD Spread|
|Your capital is at risk US Clients: No Regulated : Yes||
– Flexible leverage up to 500:1
|72% of retail CFD accounts lose money. US Clients: No Regulated : Yes||
– Ultra-fast execution from 0.2s
|$100||from 0.0 pips||
Sign Up Your capital is at risk
|Your capital is at risk US Clients: No Regulated : Yes||
– 40% New Member Bonus
Sign Up Europe* CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
|82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. US Clients: No Regulated : Yes||
– FCA, ASIC, CySEC Regulated.
Sign Up 82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
|Your capital is at risk US Clients: No Regulated : Yes||$50||from 0|
If you are considering CFD trading UK brokers who are fully regulated will offer you everything you need to get started and build your trading career. It is just a case of researching and finding the broker best fitting your needs, requirements, budget and trading aims.
Don’t forget to double-check that the broker is regulated and look at important factors such as education, training and customer service. Trading with CFDs offers all the benefits of trading with leverage, but this also comes with drawbacks, as leverage amplifies both profits and losses. For this reason, you’ll want to ensure you fully understand how CFD trading works and learn to use sound risk management strategies.
There are many benefits to CFD trading, especially if you are a UK resident and taxpayer, but do take a close look at the pros and cons to ensure it is the right investment opportunity for you.