What is CFD trading?

Using CFDs you can trade in financial markets such as stocks, currencies, commodities, stock indices, ETFs, crypto currencies combined with the use of leverage and short trading.

CFD (Contracts for Differerence) is a very easy and flexible way of investing and trading with almost whatever asset one should desire.

In this article on CFD and CFD trading, we will address the vast majority of this relatively modern form of investing.

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What is CFD?

CFDs are financial contracts that allow you to speculate on price changes in an underlying asset without having to physically own the actual asset itself.

In other words you own the entitlement to the price change, but you do not “physically” own the instruments you choose to trade.

Of course, it would not be very practical if you had to buy physical oil barrels every time you speculated on the oil price……

Furthermore, CFDs are traded using margin (margin trading) which means that you only need to put up a certain percentage of the total exposure you have in an instrument.

Within the EU, you can normally leverage single shares this way up to five times.

In other words, for a stock trade with GBP 5.000 in exposure, you will only need to have a margin of GBP 1000 deposited on your trading account.

CFDs also provide the opportunity for you to short sell, which allows you to profit from a price decline of an instrument.

Benefits of CFD

Trading and investing with CFDs are extremely flexible.

CFD trading is regardless of whether one trades CFDs on stocks, indices, currencies, or any other asset class extremely flexibly.

One will very soon come to understand the many benefits of opening a CFD trading account and investing using CFDs as one’s preferred investment tool.

CFD trading differs from traditional investments in several ways;

  • CFDs mirror the underlying financial instruments/markets so that a CFD will always develop equally with the financial instrument it mirrors (be it stocks, currencies, indices, oil, ETFs, cryptocurrencies etc.).
  • Furthermore, trading CFDs one does not take physical delivery of the underlying asset so therefore one does not need any kind of traditional securities account, currency account, crypto wallet or the likes thereof.
  • All you need is a CFD trading account with an online broker.
  • All CFD trading takes place on a single trading account where gains and losses are continually settled so that you at any given time will have complete control of all positions and the value of your CFD investments.
  • CFD trading differs from traditional securities trading being traded on margin. In other words, you can use leverage on your investments.

This means that you only need to have a proportionately small sum available on your CFD trading account to trade significantly higher amounts.

This is what is often referred to as leverage.

CFD trading allows you to enter long positions and to short sell, invest and trade in all of the world’s markets from the same trading account and trading platform.

Whether you are buying stocks, buying Bitcoin, or  trading currencies  CFD trading will work excellently.

You can trade CFD on cryptocurrencies safely without worrying about where these are stored as you do not need a crypto wallet.

Invest smarter and leverage your capital better by taking advantage of the leverage opportunities that CFD trading provides to enter into larger trades.

With CFD brokers who are licensed and regulated by their respective regulators and have trading accounts and customer support in English one can easily open a trading account in just a few minutes.

CFD trading has today become a form of investment tool suitable for all types of traders and investors.

CFD History

CFD and CFD trading were initially used in England among professional investors and traders in the early 1990s.

This in order to expose oneself in the financial markets without having to physically take delivery of the various financial instruments on their holding accounts, foreign exchange accounts, and other types of securities accounts.

CFD trading was used to avoid so-called stamp duty (England and Ireland) and further because CFDs were traded on margin, the instrument was very well suited for active traders who typically buy and sell various assets rapidly.

These traders could thus utilize CFD trading and make large and more frequent CFD trades without ever having to physically settle the entire amounts on their respective trading accounts.

CFDs are an extremely flexible and cost-effective trading and investment method, and at the same time one can keep all of one’s investments in the same account.

CFD trading on stocks, indices, currencies, cryptocurrencies, and precious metals (gold, silver, copper etc.), oil and gas all kept on the same account and with only a fraction of the actual portfolio value as the necessary collateral very soon became popular.

Around the year 2000 CFD-brokers began to offer CFD trading to non-professional traders.

Since then, developments in both the usability of the various CFD trading platforms as well as the development and importance of the internet in global securities trading have meant that in practice anyone can now trade global securities with great ease.

You can now buy shares in listed companies, indices, currencies, cryptocurrencies, oil, gold and much more using CFDs.

CFDs allow you to trade oil without taking physical delivery.

CFD for beginners

Investing and trading using CFDs is a lot easier than you might think.

Using CFDs it is possible to trade and invest in absolutely everything using only one trading account.

Although, trading all kinds of assets is not necessarily what we would recommend for someone just started trading…

Often, the experience of those who open CFD trading accounts is that it can be very sensible to first trade and invest in what you already know, or have an opinion about, and/or a natural relationship with.

Especially if you are a novice in trading and investments this applies equally with CFD trading.

Start cautiously with your CFD trading and wait until you feel comfortable and confident in both the trading platform and the trading before entering into larger positions and investing in new asset classes.

CFD Copy portfolios

eToro CopyPortfolios is a popular part of eToro’s offering, and a great many of these has historically shown very good results.

Copy Portfolios are a great way to diversify investments and risk, and these include a variety of innovative topics and unique data-driven strategies.

eToro’s copy portfolios enable you to embrace a smart and innovative approach to personal investments.

Each portfolio is fully allocated and balanced, focusing on market segments you can understand and that you can relate to.

Recently, eToro lowered the minimum investment amount for most of the copy portfolios to $1,000.

The portfolios include favorites such as;

  • ShoppingCart (138.68% 2020 Returns)
  • RenewableEnergy (71.09% 2020 Return)
  • CryptoPortfolio (201.84% 2020 Return)
  • OutSmartNSDQ (69.99% 2020 Return)
  • InTheGame (70.94% 2020 Returns)
  • CyberSecurity (45.48% 2020 Avkastning)

You can see more on all the portfolios here

Learn to trade CFD

There are a number of courses and web sites with CFD brokers offering trading lessons and so forth.

Our experience, however, is that if you are going to invest and eventually learn trading, there is nothing that beats practical experience. This of course also applies to CFD trading.

All of us fail to a certain extent in the process of learning new things. Trading and investments are (unfortunately) no exception…

The most important thing to address as an inexperienced CFD trader is not to take on too many, and / or to large positions at the same time.

Further, it is important to know when to realize profits and losses and to exercise strict discipline upon doing so.

Daytrading with CFDs

A lot of day-traders use CFDs for their trading, and this is not without good reason.

The fact that CFD gives you the ability to both buy long positions and short sell combined with leverage that enables more and larger investments, and the fact that in practice one needs nothing but a single trading account to get started has made CFD trading extremely popular among day-traders worldwide.

With only one trading platform to handle all your trades CFD trading has become the preferred investment tool for millions and millions of traders and investors around the world.

CFD trading works very well for daytrading all kinds of assets for traders both with and without much experience.

CFD trading and global shares

If you want to use CFD to trade foreign stocks such as Apple, Tesla, Microsoft, BMW, etc. this is done just as easily as trading domestic assets from the same trading account.

Investors using CFD also can sell short, often referred to as ‘to short’. This can be done just as easily as any other trade in the almost infinite range of investment opportunities that CFDs provide.

Equities, indices, currencies, and commodities are some of the most traded instruments using CFDs.

CFD trading platforms are very intuitive and easy to use, and once you have chosen a CFD broker, established your trading account and trading platform, it does not take long to familiarize yourself with, -and become confident using the trading platform.

Historically, most people who invest and trade with CFDs have used PCs, while during recent years this has shifted towards the majority now useing mobile phones.

Some online brokers state that as much as 80% of their CFD trades are now done using mobile phones (this, of course, varies slightly from broker to broker).

Either way, you can of course choose to use your phone, PC, tablet etc. and make your CFD trades on the platform you prefer.

Whether You are a daytrader trading stocks, currencies or cryptocurrencies, or perhaps You are trading long, – or short-term with indices, oil or gold, you will soon discover that CFD trading is very flexible and easy to both understand and to use in practice.

Shorting selling stocks and other instruments using CFDs

Short selling, short trading or selling short are all commonly used expressions of selling something that you do not own.

This is often stocks, and this is typically done by investors believing that the price is about to decline, and they are selling in order for them to later be able to buy the shares back at a lower price.

CFDs are the easiest way for most people to short sell securities because of the enormous flexibility of the CFDs.

Example of short selling a CFD:

Let’s say you short sell an oil-related share like BP at the price of GBP 15 because you believe that the price of the BP shares are about to decline as a result of, – for example, a sudden drop in the oil price.

Given that you get it right, and the price of the BP shares then drop to GBP 10, at which point you decide to buy the stocks you will have made GBP 5 because of the price movement.

Many investors and traders choose to use CFDs to short-trade in indices and commodities as it can often be easier to predict the direction of the entire market rather than predicting individual stock price movements.

Short selling single stocks carries significantly more risk than shorting stock indices as this requires much more knowledge of each individual stock.

You can read more about short selling stocks and other financial instruments in the article short selling shares.

Leverage and CFD trading

CFDs are traded on margin. This means that you only require a small portion of the traded amount in your trading account to carry out a (much larger) trade.

Most CFD brokers offer 1:30 as the maximum leverage for non-professional clients (this is regulated by the Financial Supervisory Authority, and within the EU this has in practice now become standard).

This means that if, for example, you have $10,000 in your trading account, you can hold CFD positions up to $300,000.

Clients that fulfill the formal requirements may request to be categorized as professional clients.  This applies to clients who have the formal competence and sufficient amounts of investment funds;

Further, if you open a trading account outside the EU you may be offered virtually unlimited leverage on your trading and investments.

You will find a detailed overview of all leverage levels in Skilling’s trading platforms within and outside the EU explaining the leverage of the various asset classes in this article on leverage.

How to choose the right CFD online broker?

No brokers are best at everything, but some are very good in a lot of things…

As a British client living in Britain there are often not too many good reasons in choosing a CFD broker who is not licensed in Britain.

English customer service and English language in the trading platform are also factors one would prefer when choosing a broker.

Furthermore, the range of available instruments in the different trading platforms is of course an important factor upon choosing a broker.

If you know that you are going to invest and trade a lot with British securities, it is a good idea to make sure that the broker you choose actually offers these.

Furthermore, it is preferrable to open a trading account in your own currency to avoid any exchange cost and corresponding currency risk.

The best CFD trading platforms

For Beginners – Skilling Trader

If you are a novise, the most important thing for you is that the trading platform you use for your CFD trading is as simple and straightforward as possible.

The Scandinavian online broker Skilling has developed its own trading platform which is by far the easiest we have ever tested.

The platform offers a ‘Trade Assistant’ function that one can use which in a very easy to understand manner guides you through every single trade for as long as you feel the need for it.

For experienced traders – Spotware cTrader

If you have experience within CFD trading or are familiar to other trading platforms the cTrader platform developed by the company Spotware is a very good option.

The platform offers full access to all the trading tools you may need while at the same time being much more user-friendly than what is usually normal for such a comprehensive trading platform.

This is a very powerful trading platform with a lot more advanced features, such as i.e., algorithm-based trading, often called algo trading.

The cTrader platform offers all kinds of order types and technical indicators, all of which can make your trading experience even better.

For professionals – Metatrader4 (MT4)

The industry standard over the last 15-20 years which is the by far most used trading platform for CFD and foreign exchange trading globally.

With countless features and endless plug-ins, this trading platform is the closest you come to a reference platform for CFD and currency trading.

Unfortunately, this is at the same time a very old trading platform that in no way lives up to the requirements we as traders and investors have to usability today.

Metaquotes supplying Metatrader4 (MT4) launched a new version many years ago (Metatrader5 – MT5) without the market having chosen to upgrade.

Metatrader5 (MT5) has not caught on and the metatrader4 (MT4) continues to be the preferred industry standard of trading platforms for currency and CFD trading among those users who utilize the most advanced trading tools.

At the same time, it should be mentioned that among most European CFD and currency traders the MT4 is not very popular as these usually have a lot higher demand of usability combined with the fact that most of the features offered in the MT4 trading platform are not always found necessary to most traders.

China, Japan, Eastern Europe and partly Latin America are today those segments who mostly use the MT4 trading platform from Metaquotes.

If you want to test the MT4 trading platform, we recommend that you use a CFD broker that simultaneously offers other and more user-friendly trading platforms

This way, you can switch seamlessly between the different trading platforms and not risk having to change your broker due to the fact that you may not like the user experience of the MT4 platform.

Today Skilling is the only online broker in the world that has a seamless integration with cTrader in order for you to be able to trade on multiple world-leading platforms from one single trading account.

The integration with the cTrader platform helped place Skilling on the international fin-tech scene, and the Scandinavian broker has since made a very solid impression and are today by far our most preferred CFD broker

If you want to open a trading account, this only takes a few minutes, and you can get started with a minimum deposit of just GBP/USD/EUR100.

You can also open a demo account to familiarize yourself with the different CFD trading platforms and practice trading with this before you choose to make a deposit.