What is CFD trading?

CFDs, or Contract for Differences, are financial products that allow traders to speculate on the price movements of a heap of financial instruments, including forex, stocks, indices, commodities, and cryptocurrencies. These products allow traders to make trades without owning the underlying assets.

In CFD trading, traders make a profit or loss based on the difference between the opening and closing price of a particular asset. If the price moves in the direction that the trader predicted, they will make a profit, and if it moves against them, they will make a loss.

CFDs are considered high-risk, high-reward investments, as they are typically leveraged products. This means that traders can open positions that are larger than the amount of capital they have invested, potentially increasing the return on their investment, but also increasing the risk of losses.

To open a CFD account in the UK, traders usually need to make a minimum deposit of around £100, making it accessible to most traders. CFD accounts are generally commission-free, but the spreads may be wider than those offered by Non-Dealing Desk (NDD) brokers or some market makers, meaning traders may have to pay more to open and close positions compared to other types of brokers.

CFD Trading Is Not Tax Free

In the United Kingdom, unlike Spread Betting, profits from CFD trading are generally subject to capital gains tax. This means that any profit that a trader makes from trading CFDs is considered a capital gain and is subject to the relevant tax rate, which is currently set at 10% for basic rate taxpayers and 20% for higher rate taxpayers.

Traders should consult with a tax professional or research the tax laws before engaging in CFD trading or any other financial activity, in order to understand their tax obligations and to ensure that they are in compliance with the relevant laws and regulations.

CFD Brokers

Here is a list of some of the most popular CFD brokers that are based in the United Kingdom and regulated by the FCA:

• City Index
• IG Group
• CMC Markets
• Admiral Markets
• Forex.com
• OANDA
• Plus500
• eToro
• Trading 212
• XTB

CFD vs Spread Betting

CFD trading and spread betting are both financial derivative products that allow traders to speculate on price movements, however, there are some key differences between the two products that you should know:

Tax treatment: In the UK, profits from spread betting are generally tax-free, while profits from CFD trading are generally subject to capital gains tax.

Regulation: Spread betting is generally regulated as a gambling activity, while CFD trading is generally regulated as a financial product. This means that CFD trading is subject to greater regulatory oversight and may offer additional protections for traders.

Leverage: Both CFD trading and spread betting allows traders to leverage their capital, meaning they can open positions that are larger than the amount of capital they have in their accounts. However, the maximum leverage that is available may vary between the two products.

Spreads: Spread betting providers generally offer fixed spreads, while the spreads offered by CFD brokers may vary depending on market conditions.

Availability: Spread betting is primarily offered in the United Kingdom and Ireland, while CFD trading is available in many more countries.