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GUIDE | TRADING BASICS | BEGINNER

What is CFD trading?

Understand the mechanics and advantages of trading CFDs

Trading is risky. Your capital is at risk.

What are CFDs?

CFDs are popular financial instruments which are key components of a trader's portfolio. However - and particularly for traders at the start of their trading journey - it can be difficult to fully understand the advantages and disadvantages of investing in and trading CFDs.

For that reason, FXTM has created a guide to CFDs, answering the big question, 'what is CFD trading?' In this guide, we will be taking a balanced look at trading CFDs, giving you access to all the information you need to decide whether it's the right instrument for you, and how these assets can be tailored to suit your trading style.

Contracts for Difference

Understanding what CFDs are

The term CFD stands for contract for difference which is a type of trading and a popular gateway for investors to enter the financial markets. They are offered by brokers for common instruments like forex, commodities and spot metals.

CFDs are a form of derivative trading. As in, they derive their value from the movement of an underlying asset. They allow traders to trade price movements without actually owning the underlying asset.

Engaging in a Contract

When traders choose to trade CFDs, it means that they are engaging in a contract between themselves and the broker. The trader – the “buyer” – and the broker – the “seller” – agree to a contract which speculates on the price of an asset in market conditions.

By not owning the underlying asset, CFD traders can avoid some of the disadvantages and costs of traditional trading.

What is CFD Trading?

How exactly does this contract work?

Essentially, profit and loss are calculated by looking at the difference in price between when a contract is entered and when it is exited. That means that the broker – or ‘seller’ – who enters into this contract with you will pay you the difference between the price at the beginning of the contract and the price at the end.

If a loss is made, the trader – “buyer” – will pay the broker the difference.

Calculating profit and loss

The key calculation to work out your profit or loss is the difference between the price at which you enter and the price when you exit, multiplied by your number of CFD units. CFDs are available across a huge range of markets. With FXTM for example, CFD traders can choose from CFDs on shares, indices, commodities. To find out more about the individual CFDs on offer, you can visit FXTM’s detailed contract specifications page.

What are CFDs?

Find out about the advantages of trading CFDs in our video

How to Trade CFDs

Trading CFDs with an experienced broker is a simple process. Once you have opened your trading account, you’re just a few steps away from selecting your instrument and starting to trade. Don’t forget – you can always try out your CFD trading preferences using a Demo account to ensure you’re comfortable with your chosen instrument before you enter the live markets.

Three steps to get you started

Between share CFDs, index CFDs and commodity CFDs, choosing your underlying asset is an important choice. Not sure which to choose? Check out our beginner’s guides to forex and forex trading for a broad overview of the underlying assets you can choose from.

Alternatively, discover which markets are hitting the headlines by following the latest market analysis reports and videos. You can discover the particular specifics of each CFD by visiting a broker’s contract specifications page, where you can find out about instrument leverage specifics and competitive trading costs.

Once you’ve decided what kind of CFD you’re going to trade, it’s time to decide on your position. Put simply, if you think the price of your asset will go up you can open a long position (buy), or if you think the price will fall you could open a short position (sell).

To decide what kind of trade you want to open, you can use a broad range of indicators, charts and signals. To find out more about popular strategies and indicators, you can visit our forex strategies guide.

Next, choose the size of the position you want to open. The value of a unit of the CFD you’re trading will depend upon the instrument, so you should calculate the number of CFD units that can work best with your trading strategy.

CFDs can be traded on the industry’s most popular trading platforms, including MetaTrader 4 (MT4) and MetaTrader 5 (MT5). These platforms are equipped with all the tools you need to trade CFDs, including over 50 technical indicators and charting tools. You can also trade on mobile apps, allowing you to keep track of your profits and losses in real-time, on-the-go.

CFD Margin and Leverage

Margin and leverage are important considerations when trading CFDs.
One of the key advantages of CFD trading is that you only need to deposit a small percentage of the total trade value. FXTM CFD traders only require a margin starting from 3 percent. FXTM’s margin calculator is a useful tool to help you to manage your margin on the FXTM Standard account.

Leverage is higher with CFDs than with traditional trading.
Traders use a smaller portion of their own capital when opening a position, which allows for potentially bigger returns. That said, it’s important to remember that leverage carries the same potential to increase losses as it does to boost profits.

Trade a range of CFD markets with FXTM

Compare accounts

FXTM have a range of trading accounts on offer for CFD trading. These are suitable for both beginner and advanced traders alike, and come with an array of competitive leverage and margin requirements. Discover more about each main account type below.

micro

MICRO

advantage

ADVANTAGE

advantage-plus

ADVANTAGE PLUS

MINIMUM DEPOSIT

$£ 10

MINIMUM DEPOSIT

$£ 500

MINIMUM DEPOSIT

$£ 500

SPREADS

From 1.5

SPREADS

From 0.0

SPREADS

From 1.5

COMMISSIONS

Zero

COMMISSIONS

Average of $0.4-$2 based on volume

COMMISSIONS

Zero

TRADING INSTRUMENTS

FX

Metals

Commodities

Indices

FX indices

Stock baskets

Stock CFDs (only MT5)

Stocks (only MT4)

TRADING INSTRUMENTS

FX

Metals

Commodities

Indices

FX indices

Stock baskets

TRADING INSTRUMENTS

FX

Metals

Commodities

Indices

FX indices

Stock CFDs (only MT5)

Stocks (only MT4)

ORDER EXECUTION

Instant Execution

ORDER EXECUTION

Market Execution

ORDER EXECUTION

Market Execution

CURRENCY

US Cent / EU Cent / GBP

CURRENCY

USD / EUR/ GBP

CURRENCY

USD / EUR/ GBP

LEVERAGE/MARGIN REQUIREMENTS

Up to 1:30 (fixed)

LEVERAGE/MARGIN REQUIREMENTS

Up to 1:30 (fixed)

LEVERAGE/MARGIN REQUIREMENTS

Up to 1:30 (fixed)

MARGIN CALL

60%

MARGIN CALL

60%

MARGIN CALL

60%

STOP OUT

40%

STOP OUT

40%

STOP OUT

40%

SWAP FREE

Yes

SWAP FREE

Yes

SWAP FREE

Yes

LIMIT & STOP LEVELS

1 Spread

LIMIT & STOP LEVELS

1 Spread

LIMIT & STOP LEVELS

1 Spread

DECIMAL QUOTES ON FX AND METALS

FX: 5 decimals (3 on JPY pairs), Metals: 2 decimals for XAUUSD, 3 decimals for XAGUSD

DECIMAL QUOTES ON FX AND METALS

FX: 5 decimals (3 on JPY pairs), Metals: 2 decimals for XAUUSD, 3 decimals for XAGUSD

DECIMAL QUOTES ON FX AND METALS

FX: 5 decimals (3 on JPY pairs), Metals: 2 decimals for XAUUSD, 3 decimals for XAGUSD

MINIMUM VOLUME IN LOTS PER TRADE

0.01

MINIMUM VOLUME IN LOTS PER TRADE

0.01

MINIMUM VOLUME IN LOTS PER TRADE

0.01

MAXIMUM NUMBER OF ORDERS

300

MAXIMUM NUMBER OF ORDERS

300

MAXIMUM NUMBER OF ORDERS

300

MAXIMUM VOLUME IN LOTS OF ORDERS

10

MAXIMUM VOLUME IN LOTS OF ORDERS

10

MAXIMUM VOLUME IN LOTS OF ORDERS

10

MAXIMUM VOLUME OF PENDING ORDERS

100

MAXIMUM VOLUME OF PENDING ORDERS

100

MAXIMUM VOLUME OF PENDING ORDERS

100

MINIMUM DEPOSIT

$£ 10

Spreads

From 1.5

Commissions

Zero

Trading instruments

  • FX
  • Metals
  • Commodities
  • Indices
  • FX indices
  • Stock baskets
  • Stock CFDs (only MT5)
  • Stocks (only MT4)

ORDER EXECUTION

Market Execution

CURRENCY

From 0.0

LEVERAGE / MARGIN REQUIREMENTS

Up to 1:30 (fixed)

Margin call

60%

STOP OUT

40%

SWAP FREE

YES

LIMIT and stop levels

1 Spread

DECIMAL QUOTES ON FX AND METALS

FX: 5 decimals (3 on JPY pairs), Metals: 2 decimals for XAUUSD, 3 decimals for XAGUSD

MINIMUM VOLUME IN LOTS PER TRADE

0.01

MINIMUM NUMBER OF ORDERS

300

MAXIMUM VOLUME IN LOTS OF ORDERS

10

MAXIMUM VOLUME OF PENDING ORDERS

100

MINIMUM DEPOSIT

$£ 500

Spreads

From 0.0

Commissions

Average of $0.4-$2
based on volume

Trading instruments

  • FX
  • Metals
  • Commodities
  • Indices
  • FX indices
  • Stock baskets
  • Stock CFDs (only MT5)
  • Stocks (only MT4)

ORDER EXECUTION

Market Execution

CURRENCY

From 0.0

LEVERAGE / MARGIN REQUIREMENTS

Up to 1:30 (fixed)

Margin call

60%

STOP OUT

40%

SWAP FREE

YES

LIMIT and stop levels

1 Spread

DECIMAL QUOTES ON FX AND METALS

FX: 5 decimals (3 on JPY pairs), Metals: 2 decimals for XAUUSD, 3 decimals for XAGUSD

MINIMUM VOLUME IN LOTS PER TRADE

0.01

MINIMUM NUMBER OF ORDERS

300

MAXIMUM VOLUME IN LOTS OF ORDERS

10

MAXIMUM VOLUME OF PENDING ORDERS

100

MINIMUM DEPOSIT

$£ 500

Spreads

From 1.5

Commissions

Zero

Trading instruments

  • FX
  • Metals
  • Commodities
  • Indices
  • FX indices
  • Stock baskets
  • Stock CFDs (only MT5)
  • Stocks (only MT4)

ORDER EXECUTION

Market Execution

CURRENCY

From 0.0

LEVERAGE / MARGIN REQUIREMENTS

Up to 1:30 (fixed)

Margin call

60%

STOP OUT

40%

SWAP FREE

YES

LIMIT and stop levels

1 Spread

DECIMAL QUOTES ON FX AND METALS

FX: 5 decimals (3 on JPY pairs), Metals: 2 decimals for XAUUSD, 3 decimals for XAGUSD

MINIMUM VOLUME IN LOTS PER TRADE

0.01

MINIMUM NUMBER OF ORDERS

300

MAXIMUM VOLUME IN LOTS OF ORDERS

10

MAXIMUM VOLUME OF PENDING ORDERS

100

Start trading with FXTM

Discover and capitalize on opportunities in the markets by trading CFDs.

CFD Trading Platforms

Hone the power of CFD trading with MetaTrader
MT4 and MT5 are complete with the latest charts and tools to help you advance your CFD trading strategy. With FXTM, you can use the industry’s most popular platforms to trade CFDs across shares, indices, commodities. MetaTrader is complete with updated tools to give you a smooth, user-friendly CFD trading experience.

Discover how the latest features can improve your market understanding and analysis.
Most of our traders lover trading on MT apps from their mobile. These apps enable you to access the markets from the palm of your hand, wherever you go. Download today to manage your trades in seconds, view your trading accounts and access live currency rates.

History of CFD Providers

CFD providers give traders access to the online markets with varying margin requirements, account types and trading platforms. The instrument has only been available to retail clients since the late 1990s. However they quickly picked up momentum.

Online CFD providers opened the door to a host of new possibilities for traders, including adding derivatives to their portfolio. Today the London School of Economics estimates that CFD trading accounts for more than a third of all stock market trades in the UK.

Choosing a CFD Broker

When it comes to choosing a broker to trade CFDs with, it’s important to make the right choice. Traders should look for brokers who are regulated, secure and experienced, including award-winning brokers like FXTM.

Advantages of Trading CFDs

Brokers typically offer CFDs with higher leverage than other traditional financial instruments. FXTM offers a leverage up to 1:2000 which can boost traders’ potential profits. The lower margin requirements of CFDs mean that potential returns are greater overall – however, traders should bear in mind that leverage can boost losses as well as profits.

CFDs grant traders the ability to go both long and short on instruments. Since the underlying asset isn’t actually owned, traders have greater flexibility and can open short positions on CFD trading instruments without worrying about additional costs.

Most brokers offer CFDs on a wide range of markets. You can enter the commodity, indices, stocks and metal markets with FXTM and trade these assets as CFDs, enjoying the opportunities and advantages associated with each.

Although CFDs spare traders from many of the costs of traditional trading, CFD traders are required to pay the costs of spreads. CFD traders have to pay the spread on entry and exit positions, meaning that it’s potentially harder to make small profits. The spread cost must be factored in to the calculated profits and losses resulting from CFD trading.

The good news here is that the FXTM Advantage account offers typically zero spreads on FX majors and as low as zero on Gold, which are CFD products.

CFDs do not come without risks. Trading these instruments can be risky and fast-paced, and traders should be careful to have a thorough risk-management strategy in place. Placing stop-loss orders can potentially help to minimise potential losses, but do not eliminate the risks altogether.

How Are CFDs Taxed?

With regards to tax, there is no stamp duty to pay on CFDs since the underlying asset isn’t owned. However, capital gains tax still applies. Overall, tax represents one of the areas that CFDs save traders costs compared to traditional trading.

What makes a CFD trader successful?

At FXTM, we believe that a successful trader is an educated trader.

Popular CFD trading strategies to bear in mind

Read our guide to trading strategies

Dive deeper into strategies that FX and CFD traders love to work with.