What Is CFD?
What is CFD when it comes to trading?
Traditionally you can buy actual shares in a company, or an actual commodity.
However, in the 1990s CFDs were developed in the UK, to enable traders to trade the rise and fall of stock and commodity prices without actually buying the underlying stock.
Here you can see that there is a market maker, that is a company that provides a trading platform where you can profit from rises or falls in a stock price for example, without being real owners of the share or commodity.
There are typically a variety of CFD products available:
CFDs on a variety of international markets int he above products
Costs of CFD trading include:
Differences between CFD providers:
Since CFDs are in fact a diverse group of products, and providers vary between each other in what they offer to traders, it's important to keep these points in mind:
1. Different CFDs are offered
Typically the top shares in an exchanged are offered, but some may not be.
2. Different margin requirements
Some providers require smaller margins eg 10-20% for some stocks, and up to 80-100% for others, and this varies between providers, so check their lists and pdfs.
3. Different commissions
These vary from nil to % costs with a minimum cost also is typical.
4. Different spreads
What many peoplr don't realise is that the spread can vary between CFD brokers and in some providers with zero commissions, there is the spread (difference between the bid and ask prices) that the provider makes their money on.
5. Different types of orders
Some providers offer stop entries, whereas some don't and only have limit entries. Some provide guaranteed stops (at a cost) and some don't.
6. Different ways stop losses are triggered
The rules here can be varied from stop if touched, stop if the bid or ask goes through the price. Also, some require enough liquidity in the underlying stock to enable your position to go through. Some count your trade size as part of that liquidity, some don't.
7. Different interest costs
If you hold overnight positions, ie positions greater than a day, then interest is paid, or if short, then you are paid interest. The rate is usually based on a bank's base rate.
All trading involves a high risk of financial loss, and the information on this site is for general information purposes only and is not financial advice in any form. Seek your own financial advice before taking any action.
All forms of trading involves risk of financial loss.
Also note that CFD trading is not legally permitted in some countries.
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