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What is CFD Trading?

Read more about what CFD trading is, how to trade CFDs and discover a range of tips and strategies.

A contract for difference (CFD) enables retail and institutional investors to speculate on the underlying market prices of a wide range of financial assets. As the trader never owns the underlying asset, CFDs are called derivative products and these rely on leverage to enable the trader to speculate on price movements without needing to put up the full value of the security being traded.

CFDs allow trading on currencies (forex), stock market indices, shares, commodities, interest rates and bonds.

A CFD is essentially an agreement to exchange the difference between the opening price and closing price of the security being traded. The difference multiplied by the position size constitutes the profit/loss.

CFDs v Spread betting: What’s the difference?

CFDs v Spread betting: What’s the difference?

Like spread betting, traders of CFDs can potentially profit whatever direction the market takes as it is possible to open short and long positions on a contract. It is also free from Stamp Duty in the UK, although Capital Gains Tax is payable on any profits*. The advantage of this is that CFD trading can be used to hedge a share portfolio, allowing the trader offset losses against their tax liabilities.

Trades are handled slightly differently, although for the trader the experience is almost identical. In spread betting the contract size is determined by the amount of money the trader is prepared to stake per point. CFD trading involves buying or selling contracts that represent a certain amount per point in the market.

There are no commissions for spread betting or for most CFDs. However for CFDs there are usually commissions for trading on certain equities.

Current CFD equity commissions at ETX:
CFD UK Equities – 0.08% (8bps)
CFD US Equities – 1.5 cents per share
CFD Euro Equities: 0.1% of the Notional Value (exposure on the trade)

*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

Advantages of CFDs

Advantages of CFDs

  • No stamp duty
  • Long or short - trade in either direction
  • Ability to hedge share portfolio
  • Tight spreads starting at 1pt on indices and from 0.6 pips on forex pairs
  • Trade online and via our mobile app
  • Two trading platforms – TraderPro and MT4

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