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.

CFD Types:

There are typically a variety of CFD products available:

  • CFDs on stocks and shares
  • CFDs on commodities
  • CFDs on indices

CFDs on a variety of international markets int he above products

CFD Costs:

Costs of CFD trading include:

  • Commissions
  • Interest for long positions > 1 day
  • ASX or WebIress fees if requiring data for certain platforms or markets

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.

Note:

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.

Note that this site may have paid advertising or commissions generated for referrals to products and services, and CFD providers made from this site.

We cannot guarantee the accuracy of information, or that any information published has not changed since time of publication.

If and where there are claims of results from using products or services, do not guarantee or in any way indicate that these results are typical or guaranteed.

See our disclaimer for further information.