What is CFD trading?

You can trade in CFDs across various global financial markets. However, understanding the risks can help you to avoid big money losses. Here is a guide on how CFDs work and how to begin trading.

What is it?

A Contract for Difference (CFD) is a leveraged investment which means that you do not need to commit all your money on a single trade.

Also known as trading on margin, you only need to place a percentage of the trade to open your position, which is normally between 0.1% and 1%.

This offers you the flexibility to spread your investments over numerous trades in various markets, such as:

  • Foreign exchange
  • Shares in companies
  • Indices, such as the FTSE 100
  • Commodities, such as gold and silver

How does it work?

When you make a trade you receive two prices, the buy price, and the selling price:

If you think a value will increase, you could go long and buy some CFDs
If you think a value will  decrease, you could go short and sell some CFDs
The difference between the prices of the two is known as the spread. To earn profit, you must close your position after the price has moved more than the value of the spread.

For example, if the purchase price for the FTSE 100 is 6801 and the selling price is 6800, the cost would need to grow by more than 1 point* to make you a profit.

How does the spread work?

When selecting a CFD trading platform, the main thing to look out for is the spread’s size.

The smaller the spread of the CFD, the smaller the market movement demands to be to be able to give you a profit, for example:

  • Platform A has a sell/buy price worth 6800/6801 (one point spread) on the FTSE 100. The market would need to increase by two points to give you a profit.
  • Platform B has a sell/buy price worth 6798/6801 (three-point spread) on the FTSE 100. The market would need to increase by four points to give you a profit.

What is the margin?

It is the amount you need to place to open your CFD trade. It is different between various CFD companies.

For example, if the margin for a trade is 1%, and you want to purchase 100 FTSE 100 contracts with a sell/buy price of 6800/6801, you will need a deposit of £68.01 (1% of 6801).

The margin serves as a deposit which satisfies some of your losses if the trade works against you.

Your losses could still surpass your deposit, so make sure you understand the risks involved before you begin trading.

How can you earn a profit?

When you perform a CFD trade, you buy a number of contracts. If the market moves in the direction that you predict, you could earn a profit.

Below is an example of how a CFD trade could make or lose your money:

The sell/buy price for the FTSE 100 is 6800/6801, meaning each contract at the selling price is worth £6,800, or £6,801 for the buy price, you purchase five CFDs, the cost of the trade would be worth £34,005 (5 CFDs x £6801)
You only need to put down a 1% margin to open your trade, worth £340.05 (1% of £34,005)

To earn a profit, the selling price needs to be more than the buy price that you bought your CFD:

You sell your five CFDs when the sell/buy price is 6806/6807
Multiply the selling price by a number of CFDs to give you £34,030 (5 x £6806)
Deduct this amount from your original contract value, £34,030 minus £34,005, and you have a profit of £25

If the selling price is below the amount that you bought your CFDs at, you will make a loss, for example:

You sell your five CFDs when the sell/buy price is 6796/6797
Multiply the selling price by a number of CFDs to give you £33,980 (5 x £6796)
Subtract this amount from your original contract value, £33,980 minus £34,005, and you have a loss of £25

What are the fees to be applied?

Here are some other charges you may find when trading CFDs:

  • Overnight trade interest charge: CFD companies set an interest charge of around 1.5% for any trades you leave open overnight.
  • Inactivity fee: If you have not yet traded for a set term, such as two years, you could face a monthly charge of around £12 until you close your account or start trading again.
  • Funding/withdrawal fee: Companies charge you to withdraw or add money to your account, such as a set fee of £5 for every £200.

Do you have to pay tax?

You do not need to pay income tax or stamp duty when you invest in CFD trading.

In a single tax year, if your profits exceed £11,300  (6th April until the following 5th April) you have to pay Capital Gains Tax.

However, you can opt to offset any Capital Gains Tax with any losses that you make when CFD trading.

What to do next

Listed below are some top tips to follow before trading in CFDs:

  • Do not make trades until you have taken the time to study the market, and make sure that you only trade the amount of money you can afford to lose.
  • Open and make use of a demo account to familiarise yourself with your chosen platform
  • Do not perform an emotional trade, like if you want to make up from any big losses
  • Only make trades on markets you understand

See also : How to Execute a CFD Trade

How to Execute a CFD Trade

Here is a guide what to expect when setting up a CFD account and the things you can do to effectively manage your CFD trades.

Register an account

Select a CFD (contract for difference) trading broker, then register for an account before you start trading. The details you need to provide includes:

NameEmail Address
AddressDate of Birth
Telephone/mobile numberIdentification, e.g. passport number

You may also be required to answer the following questions:

  • How much experience do you have in trading?
  • How much knowledge do you have regarding trading?
  • How often do you trade?

Just indicate zero or none for each question if you have never traded before.

Add money to invest

Before you can open a position, or make a trade, you need to add cash to your CFD account.

Every trade uses only a small percentage of your funds when you open a position.

All CFD trades demand you to put down a deposit, also known as the margin, to help satisfy any losses on your trade.

Choose where to trade

You can trade CFDs in various markets, including:

  • Equities: e.g., Barclays, Tesco, Vodafone, and BT Group
  • Indices: e.g., Wall Street. US Tech 100, and FTSE 100
  • Commodities: e.g., silver, gold, gas, oil, wheat, sugar, and oats
  • Foreign Exchange (FX): e.g., US dollar/Canadian dollar and euro/Japanese yen

How can you choose?

Many CFD platforms provide you the option of checking the previous performance of a market before you place your bid. However, You can also look at:

  • News: Updates on economic impacts that could have an effect on your trade from news feeds worldwide.
  • Performance charts: Displays how a market has performed, from the last year based on daily readings, for example, (although this does not guarantee future success).
  • Market Information: Explains how much you can trade and other information, including the cost of any commission charges.

Make a trade

To make a trade, decide whether to go short or long on a position and the amount you want to trade.

The margin depends on the trade. You normally need a greater margin for riskier investments.

CFD trades which have a greater margin could cause you to lose a huge percentage of your money, but also have the potential to earn you a large profit.

CFD trading tools

Instead of constantly watching your trades, you can make use of CFD trading tools to help you manage your trades, for example:

  • Limit order: Once your trade approaches a certain value that displays the amount of profit that you are happy to take, this closes your position.
  • Stop loss: To dodge a huge loss, determine a value for your position to close, so your losses are only as much as you are prepared to lose.

Here is an example of how a stop loss works:

You open a trade worth 6801 on the FTSE 100,
You think the value will increase, so you go long (buy)
In case the market goes against you, you choose a stop loss at 6791
If the value decreases sharply to 6780, your position still closes at 6791, limiting your losses

Here is an example of how a limit order works:

You open a trade worth 6801 on the FTSE 100,
You think the value will increase, so you go long (buy) and pick a limit order at 6806
If the value increases to 6806, your position will close and you will earn a profit

Check your trade

Every CFD platform gives you tools to assist you in managing your CFD trades, meaning that you do not need to keep watching the performance of your trades.

To avoid big losses, make sensible trades, for example, avoid investing more because you are losing money on another trade.

Your CFD platform allows you see all of your open trades, giving you easy access to them while they remain active.

Close your trade

You can close a trade anytime, even if you have set a limit order or stop loss on it.

Once you are ready, go to where your platform enumerates your active trades then click on them to choose to close them.

You are responsible for any trades you perform, so you must understand the market you invest in if you want to increase your chances of earning a profit.

See also: What is CFD Trading

How to Start Forex Trading

You can perform a forex trade 24 hours a day and five days a week. However, choosing the right account could help you get closer to earning a profit. Here is a guide on how to get started with forex trading.

What is forex trading?

Forex trading is a high-risk investment, and you could lose more amount than your deposit.

Look for a broker

You need to have a forex account with a broker as they will give you a platform that you could use to trade on.

Here is an example of two brokers and their bid and ask exchange rates for the EUR/USD:

BrokerBid exchange rateAsk exchange rateSpread
A1.12310 1.123211 pip
B1.12310 1.123312 pips

Going for the broker with the lowest spread implies that the exchange rate must only make a smaller movement before you can earn a profit, for example:

  • To earn a profit with broker A, the exchange rate must move by 1.1 pip or more in your favour.
  • To earn a profit with broker B, the exchange rate must move by 2.1 pips or more in your favour.

Forex trading chargers

Even though most forex brokers combine the costs in the spread that they give you, some could charge you for the following:

  • Inactivity fee: When you stop trading for a period, such as one or two years, your broker could charge you until you begin using your account again, for example, £12 per month.
  • Adding/withdrawing charge: Brokers charge if you add money to your account or withdraw from your account. This is ordinarily a set fee, such as £5 for every £200.
  • Overnight trading:  For leaving a trade overnight, some forex brokers charge you for interest. For example, 1.5% of the price of any open trades.

Open an account

After you pick a forex broker, you must complete an online registration form with them.

You will need to provide them with the following information:

  • Full Name
  • Address
  • Email Address
  • Mobile Phone Number

Your broker will then send a link via text message or email to validate your details.

You may also have to confirm your account by giving your driving licence or passport number. The name on your forex account must match the name on your ID.

If your selected broker owns demo account, make use of it to so that you can be familiar with their forex trading system before you begin using your own money.

Make a trade

You can trade in forex Monday to Friday, 24 hours a day, which means you can trade on currency pairs more frequently compared to other markets, such as commodities or indices.

Performing a trade is also called opening a position, and if you earn a profit or loss is based on the performance of the base currency as compared to the counter currency that you trade with.

The first currency is the base currency in one pair, the counter currency, on the other hand, is the second, for example, EUR/USD has a euro base currency, and a US dollar counter currency.

The exchange rate is the amount of the counter currency that you can purchase with the base currency. As an example, if the EUR/USD had an exchange rate of 1.12 you can earn $1.12 for every euro.

If the rate increases to 1.13 ($1.13 for one euro), this means that the euro’s value has increased against the US dollar as you can receive more of the counter currency for the base currency.

Forex trading tools

If you would want to manage your trades without watching them regularly, there are a few trading tools you could make use of:

  • Limit order: You pick the exchange rate your trade closes at. This allows you take a profit when the rate reaches a level you have set.
  • Stop loss: You pick the exchange rate your trade closes at. However, this does not guarantee further losses as brokers cannot always close the trade at an exact rate.
  • Guaranteed stop loss: You pay a fee to the broker, and they will close your trade at the same exchange rate you choose.
  • YBuy limit: Your broker will open a trade when the exchange rate reaches your chosen value. If the rate is not reached, the broker never actions your trade.
  • Margin call: If your losses come near your margin, your broker will ask you to add more money. If you do not, your broker will then close your trades to stop further losses.

Close your trade

Before you close your trade, also known as closing your position, you can review if you are earning a profit or a loss by studying the active trades on the platform of your chosen broker.

If you are ready, choose the trade you want to close from your active trades tab and click on the close trade button.

You are then required to verify if you want to close your trade. Then you are shown how much profit or loss you have earned.

How to Trade in Binary Options

Before you commence trading in binary options, you need to look for an account and work out how to perform a trade. Here is a guide on how to begin making trades in binary options.

Pros and cons of binary options

ProsCons
Easy to set upIt is gambling
High potential returnLosses can exceed any profits
You could make a profit fastYou could lose money fast

Binary options companies would not charge you for performing a trade or charge a commission for making use of their platforms. Instead, they earn profit from the losses you make on trades.

Choose an account

Before you trade in binary options, you should open an account. To pick the right account, consider:

  1. The potential payout
  2. The amount of what you want to trade at one time
  3. The amount you need to deposit to open the account

Open the account

When you discover an account, visit the website of the company and register with them. You will need to provide:

  1. Your personal details
  2. Your contact details
  3. Your bank details

A lot of companies will ask you to provide an initial deposit before you can begin trading in binary options, such as £100.

Perform a trade

To trade in binary options, you are required to  select:

  1. An asset to trade: For example, gold or shares in a company
  2. A time limit: This is the time when your trade will end
  3. An amount to trade: Any profit you make will be a percentage of this

 

You then get to pick from two options:

  • Call: If you expect the market to increase
  • Put: If you expect the market to decrease

You are then going to be offered a possible return based on your trade, for example, 180%. If you are correct, you earn an 80% profit, if you are wrong, you lose the money that you traded.

You could opt to sell or cancel your trade before the time expires for a partial payout. However, not all companies offer this feature.

Examples of Binary option trade

When the rate is 1.29, you want to trade on the currency pair EUR/GBP

  • The potential payout is 78%
  • You trade £100
  • You picked a duration of one hour

Here are some possible outcomes after an hour, if you were to call and put based on the binary option trade above:

Call option

Rate at the end of tradePayoutProfit/Loss
1.20£0-100%
1.28£0-100%
1.29£1000%
1.30£17878%
1.40£17878%

Put option

Rate at the end of tradePayoutProfit/Loss
1.20£178100%
1.28£178100%
1.29£1000%
1.30£0-78%
1.40£0-78%