CFD definition and explanation: 

CFD is the acronym for “contract for difference”. It is an over-the-counter derivative that can be traded on a wide range of assets. In contrast to the classical direct stock exchange trade, CFD trading has several advantages and offers the investor the possibility to conclude an investment with small as well as large capital. You can trade long or short on different markets with leverage.

CFD Trading liquidity providers

CFD Trading liquidity providers

As you see in the picture above, the online broker is selling you a “CFD contract” which is coming from liquidity providers like banks or market makers with special licenses. Some big brokers are also liquidity providers. The bank/liquidity provider is taking the counter risk party and is hedging themself on the markets.

Facts of CFD Trading: 

  • CFDs are suitable for any amount of money
  • Trading on rising and falling markets (long and short)
  • Trading with leverage
  • Low trading fees
  • High liquidity of CFD markets
  • You can use professional trading platforms

How are Contracts for Difference working?

Are you looking for valuable information on the subject of “CFDs”? – Then you are exactly right on this page. With more than 7 years of experience in the financial markets, we will explain the exciting topic of contracts for difference. On this page, you will find the basics and valuable tips.

Contracts for difference are over-the-counter contracts that can only be purchased from an online broker. When you trade with brokers, you conclude a transaction for a contract. The contract is based on an underlying asset (stock, currency, commodity, etc.) and imitates its price 1:1. As an investor, you do not own the direct underlying asset, but only the contract or claim against the online broker.

CFD trading always occurs between the two parties “Broker” and “Trader”. In the following sections, we will explain to you step by step how trading with contracts for difference works and what risks and opportunities there are.

Note:

CFD Trading is risky. You can lose your invested money.

Why were Contracts of Difference (CFDs) developed?

CFDs were developed in the 20th century by a major bank in the United Kingdom to avoid a planned stock exchange tax. This was to apply to all transactions with shares. The tax could be avoided thanks to the clever development of contracts for difference. Today they are a popular financial product for private traders. Read more on the Wikipedia article.

Facts of the history: 

  • Developed in United Kingdom to avoid a stock exchange tax
  • Developed by major banks
  • Today it’s a regulated financial product
  • Popular for many private traders

Advantages and disadvantages of CFD Trading

The biggest advantage of CFDs is that traders/investors can invest in any asset with a small amount of capital. Traders get very fast and easy access to the markets through an online broker. What was very difficult a few years ago has now become very easy thanks to the Internet.

In the following table we have summarized all advantages and disadvantages for you:

Advantages: Disadvantages:
You can start with small amounts of moneyThere are some bad brokers and scammers
Fast access to the financial marketsInvestors sometimes underestimate the risk
Negative balance protection (not all brokers)
Small trading fees
No expiry time of CFD contracts
Trading with high leverage is possible
You can easily go short on markets

How safe is CFD Trading? – It is a regulated financial product

Contracts for difference are considered safe financial products or derivatives if they are regulated by official supervisory authorities. For example, the European market for CFD Brokers is fully regulated. The European Financial Regulators impose strict rules on the distribution of these financial products. Trading under a European license is considered particularly safe.

Financial Conduct Authority regulator (FCA) for CFDs

Financial Conduct Authority regulator (FCA) for CFDs

Contracts for Difference used to be a very opaque and unregulated product with many freedoms for brokers. This was gradually restricted. In general, good and well-known CFD Brokers usually have several licenses inside and outside the EU, as these companies operate internationally.

Popular regulators are: 

CFD Trading Tutorial: How to trade CFDs

Trading CFDs is not always easy for a beginner. However, in the following steps, we will explain exactly how to start successful trading with contracts for difference step by step. Even at the beginner level, most traders make many mistakes, so we advise you to open a CFD demo account and practice trading before you start making real money.

Also, watch our full video tutorial on CFD Trading: 

1. Choose a good and reliable CFD Broker

The choice of online brokers on the internet is limitless and not easy. Beginners are mostly confused by this and pay attention to the wrong components when choosing a provider. The company should definitely be regulated, provide a good offer, low trading fees, and the necessary service.

In the table below you will find the test winners of our CFD Brokers comparison. The providers have been tested by us to the last detail. In the individual reviews, you can also read more information about these providers.

Broker:Review:Spreads:Advantages:Open Account:
1. IQ Option
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 1.0 pips+ FX & Options
+ Best platform
+ Start with $10

2. BDSwiss
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 0.0 pips + variable commission+ Individual offers
+ Trading signals
+ Personal service

3. XM
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 0.0 pips + 3.5$ commission per 1 lot+ Good conditions
+ 1,000 assets
+ Personal service

2. Open the CFD trading account

Setting up a trading account is easy nowadays. Create your trading account in a few minutes. All you need is a few personal details, email address, and a correct telephone number. After that, the account should be verified with the necessary documents.

All the providers showed above also offer you a free CFD demo account with a virtual credit balance to practice. This account imitates trading with real money. For a first deposit on the trading account, you will then have various options available (Paypal, credit card, bank transfer, etc.).

Account sign up form

Account sign up form

How to open a trading account: 

  1. Open a free trading account with one of the providers presented above
  2. The broker requires personal data from you (telephone number, address, name)
  3. The trading account must be verified with the appropriate documents (proof of residence, identity card)
  4. The trading platforms can be tested in demo accounts with virtual credit
  5. Deposits work in real-time via various providers (Paypal, credit card, e-wallets and more)

3. Use an intelligent trading platform for analysis

The trading platforms of a CFD Broker offer a variety of analysis possibilities of the existing assets. Adjustable drawing tools and indicators are available for technical analysis. Fundamental data (business news) or news on shares can also be easily viewed.

Own CFD trading strategies can be set up with the help of the platforms. For a beginner, it is still not always easy to get the right start. Therefore you should definitely take a look at the free learning materials of the above-mentioned providers. They also offer webinars and coachings for a better understanding of trading.

CFD Trading platfrom screenshot

CFD Trading platform screenshot

4. How to open your CFD position in the markets

CFD trading is similarly structured with every provider since it is always the same financial product. Select a stock, ETF, currency pair, commodity, or cryptocurrency. As these are leveraged products, you will see the contract value and the required margin. This data can be viewed on the broker’s website.

The picture below shows a typical order mask of a trading platform. This can vary from provider to provider. However, the procedure and the data for the trade are in principle always the same.

Gold CFD contract

Gold CFD contract

Due to the leverage, you only need a smaller security deposit (margin) to trade a higher contract value. Leverage makes a lot of sense because certain assets only move in small price movements per day. For example, if you invest only $100, there will only be profits/losses of a few cents.

Especially in day trading, leverage is necessary, because one wants to trade only very small movements of the market. The losses and profits can be limited to every broker. Set an automatic loss limit (Stop Loss) and profit target (Take Profit) via the order mask.

What you should know about the order mask: 

  • A simple investment in rising or falling prices
  • Invest in any asset even with small capital
  • It is a leveraged product, therefore only a smaller margin than the actual contract value is required
  • The stop loss and take profit are prices where the position is automatically closed (self-adjustable)
  • Automatic order openings are possible per limit orders at any price

5. Cost and fees of CFD Trading

For traders, there are different fees, which we will explain in the following points. It is important to understand that some brokers offer a spread account and a commission account. When commissions are paid, the spread is usually very low.

Fees for CFD trading

Fees for CFD trading

But thanks to the internet you can consider yourself lucky. The costs and fees have fallen dramatically as a result of the online offering and are continuing to fall year after year. All in all, today you pay only a fraction of the fees you paid 20 years ago. Nevertheless, it is worth paying attention, because fewer fees mean a bigger profit for you.

Costs and fees for CFD traders:

  • Spread: Difference between the buy and sell price when opening a new position. May depend on the market situation.
  • Commission: Fixed commission per trade or trading volume.
  • Daily Swaps: This is a financing fee that is incurred when a position is held overnight. CFDs are leveraged derivatives that are financed by debt. For special assets, the interest rate swap can also be positive.

Can you become rich by trading CFDs?

Unlimited profits are possible with CFD trading. There is the rule:

The higher the capital invested, the higher the profit or loss can be.

With an account of $ 500, it is almost impossible to earn several million in a short time. But it is not impossible. In general, one speaks in the trading area of risk management of about 1% of the total account per position. So if you have an account with $ 10.000 credit, you should take a risk of $ 100 in one trade. The best traders have traded with a profit-risk ratio of 1 to 3 or more. So you bet $ 100 and win $ 300. Please note, however, that there can also be losses.

See the example of a growing CFD account: 

Growing CFD account balance

Growing CFD account balance

How quickly you can achieve success depends largely on yourself and the method used in the markets. Once you have developed a safe and good tactic for trading, nothing stands in the way of your profit.

The most common failures by CFD traders – Tips & tricks:

In our opinion, the danger of a contract for difference is determined by the traders themselves. It is possible to lose all your trading capital in a short time. However, this should not happen with reasonable risk management. The problem of most unsuccessful traders is that they trade with far too large positions in the market.

1. Wrong trading times:

The trading volume of the exchange is based on the official trading hours of a market. Although many markets are electronically tradable 24 hours a day, the strong movements are based on the opening hours. Trading after the off-hours can be less profitable.

2. Unprepared position opening:

Many traders tend to open a trade unprepared. The most important fact to remember is that you need to adjust the position size to your account. Position size calculators can also help.

3. Wrong risk management and leverage: 

A high level can bring many advantages, especially if you only want to trade very small movements. However, you should be able to assess your risk at any time and adjust it to your account size. Too high a risk can cause strong, ill-considered emotional actions.

Risk of CFD Trading

Stock exchange trading is never risk-free. A trader always tries to risk his capital to make a bigger profit. People who do not want to take any risk should keep their hands off CFD Trading. Although CFDs are very risky, they are less risky than many other financial products. With the new regulations, there is no longer an obligation to make margin calls and in the worst case, the account can no longer end up in a negative balance.

Risk of CFD Trading: 

  • You can lose your invested amount of money.
  • CFDs are leveraged. This can be risky for your capital.
  • Without sensitive risk management, you will fail. Do not use too much money for one position.

Conclusion: CFDs are a good way to invest in the financial markets

In the past, we have already gained a lot of experience with the topic of Contract for Difference. It is a good opportunity for me to participate quickly and easily in the capital markets. We have tested and tried out a wide variety of providers. There are, as in every field, good and bad brokers.

In summary, the Contract for Difference is the perfect financial product for the private trader. CFD Brokers offer you trading starting at 1€. The upper limits are open. With the chart analysis and various trading indicators, you can also find perfect entries into the markets.

It does not matter which strategy or method you follow in the financial markets. Contracts for Difference are suitable for every private trader. Start now even in a free demo account with our recommended brokers.

Contracts for Difference are suitable for any type of capital. It is an easy way to go long or short on markets with leverage.

(Risk Warning: Your capital is at risk)