Disclaimer: The products or services discussed in this article may not be offered by Taurex and may only be listed here for educational purposes.

Trading CFDs (contracts for difference) gained popularity in the U.K. (United Kingdom) during the 1990s. The CFD market continues to grow today.

For instance, in 2020, an average of over 560,000 people engaged in monthly CFD trading. This data indicates that many CFD traders exist in the U.K., despite being fewer than other trader types in the country.

Suppose you plan to trade CFDs but are unsure regarding the specifics of CFD trading in the U.K.

You likely want to know whether CFD trading is allowed and regulated in the U.K. You should also learn how CFD trading works, including its potential advantages and risks. 

This article provides a comprehensive overview of CFD trading in the U.K., including how CFDs are traded in the country, the advantages and disadvantages of trading CFDs, and effective trading strategies.

Learn how and where you can trade CFDs effectively and securely.

What Is CFD Trading?

Like other forms of trading, you can trade CFDs in two ways:

• Buy the contract: You buy CFDs if you think the price will go up, then sell them later (with a higher price).

• Sell the contract: If you believe the price will decrease, you sell CFDs to prevent potential losses.

What Are CFDs?

A CFD is an agreement between the “buyer” and “seller” to exchange the difference between an underlying asset’s current value or price when any of the parties involved closes the contract. 

For Whom Are CFDs Good?

CFD trading is for traders looking for short-term trading options. Many CFD traders use technical analysis to determine when to buy or sell.

 Technical analysis means analysing historical market data — primarily asset price and volume — to predict the market price’s future movement.

What Are CFDs Used for?

Traders usually trade CFDs to diversify their investment portfolio. CFDs align with their short-term financial objectives because these products do not require actual ownership of assets. 

What’s the Appeal of CFDs? Why Do People Trade CFDs?

Here are five reasons to trade CFDs:

• Flexibility: You can go short (sell) or long (buy) with CFDs, which means you can execute trades regardless of market conditions.
• Hedging: Some investors use CFDs to hedge funds since these products can help offset losses against profits due to CGT (capital gains tax) deficits.

CGT is a levy on a person’s profit after selling an investment. In the U.K., if you pay a higher income tax rate, you must pay 20% for gains derived from chargeable assets (except residential property).

• Leverage: Being leveraged products, CFDs let traders profit (if their trades win) from an investment that’s a fraction of what their position is currently actually worth. 
• Tax benefits: CFD trading does not require investors or traders to own the underlying asset. Consequently, CFD trades are often not subject to tax impositions due to those assets.
• Longer hours: CFDs allow people to trade even after regular trading hours. 

How Does CFD Trading Work? 

Imagine a CFD as an asset bought using a short-term loan. 

You borrow money to “buy” the asset and pay interest, just like a regular loan. When you sell (usually when you think the price will decrease), you use the earnings to cover the loan and pocket the difference.

The price increase boosts your return since you borrowed most of the capital necessary to purchase the asset. Similarly, a decrease in the asset’s price amplifies your percentage loss.

What Markets or Instruments Can You Trade With CFDs?

CFDs allow you to trade the following markets or instruments:

• Commodities
• ETFs (exchange-traded funds)
• Currencies
• FX (foreign exchange) currency pairs
• Indices

Through Taurex, you can easily access CFDs tied to these instruments, enabling trading in some of the most liquid markets globally with minimal capital and a few simple clicks.

Where Can You Trade CFDs?

It is best to trade CFDs with brokers that offer transparency, fund security, low spreads and transaction costs, and access to institutional-grade trading tools. Well-established brokers, like Taurex, fit this description.

How to Find the Best CFD Platform for Your Needs

Aside from the qualities mentioned, the best CFD platform to trade is the one that matches your trading preferences and can help you achieve your trading goals.

In the U.K., traders are encouraged to use Financial Conduct Authority FCA-authorised trading platforms. The FCA is the regulatory authority overseeing various trading options in the country.

With a Taurex account, you have access to MetaTrader 5 for trading CFDs.

Regulation

The level and nature of CFD regulation depend on the place or jurisdiction you are trading.

Brokerage firms are subject to the restrictions set by the financial regulatory board of the country where they operate. 

However, some countries, like the U.S. (United States), prohibit CFD trading for residents and have no policies set for the CFD market.

Assets

Taurex offers 1500+ financial instruments under the following asset classes or markets:

• Commodities like Brent and WTI (West Texas Intermediate) crude oil
• Foreign exchange or forex pairs, including major (the most actively traded, like EUR/USD), minor (those that are not tied to the U.S. dollar), and exotic currency pairs (currencies of developing markets).
• Indices like S&P 500 (Standard and Poor’s 500) and FTSE 100 (Financial Times Stock Exchange 100)
• Metals like platinum, silver, and gold 
• Stocks, such as those listed on the NYSE (New York Stock Exchange) and NASDAQ (the National Association of Securities Dealers Automated Quotations) 

Fees

CFD trading fees depend on the commission the broker charges in general or per position in the market.

Aside from researching brokers to trade with, calculate the fees involved in relation to the funds you will realistically be using to trade. Try demo accounts to trade without risking real money.

CFD Trading Platform

Taurex offers users one of the world’s leading platforms:

• MetaTrader 5: An updated version of the MetaTrader 4, offering its predecessor’s primary features plus a newly optimised interface to give traders a complete trading experience

Trading Tools and Features

Reputable brokers don’t just offer trading options. They also provide the resources necessary for trading well. For example, Taurex offers these tools to help improve your trades:

• Acuity: Streamlines information research and market sentiment by analysing news and media.
• Trading Central: Provides trading ideas, market insights, and risk profiles.

Deposit and Withdrawal Options

Reputable brokers offer secure channels for depositing and withdrawing funds.

Taurex supports a wide variety of payment methods and currencies, making it easy to fund your account.

How Good Is the Customer Service?

Legitimate brokers know that customer support is essential, especially since real money is involved in every transaction.

For example, Taurex features various channels open 24 hours a day, five days a week, so that clients can reach customer service.

What Is a CFD Broker?

The CFD broker acts like the “middleman” between you and the CFD market. The firm provides the platform, tools, and educational materials to help you trade.

How Can You Get Started Trading CFDs?

By now, you likely know how CFD trading works and are familiar with the risks involved. You can trade CFDs through a reliable broker like Taurex. 

Engage the CFD market by funding a retail investor account, choosing the instrument you want to trade, and executing trades based on your market predictions.

It will help to determine the optimal position size. Remember to stay true to your risk management approach when trading CFDs.

Choose Taurex As Your Brokerage Firm

As indicated above, identifying the best CFD brokers for your trading needs is a significant decision. After all, the broker will handle your trades, capital, and profit. 

The following segments explain the steps involved in trading CFDs.

Open an Account

A live account lets you trade on the price shifts of many underlying assets through leverage. 

Brokers often provide various trading account options based on the client’s experience and commitment. For instance, Taurex offers these three trading account types:

• Standard: A trading account for beginners who want to gain extensive trading experience before trading alongside pros.
• Pro: An account for mid-level to professional traders who want to trade commission-free with competitive spreads.
• VIP: A trading account with competitive market spreads.

Select an Asset

CFD trading offers a wide selection of markets. For instance, Taurex offers over 1500 CFDs across metals, commodities, currencies, indices, and shares.

Deposit Funds

You must fund an account to execute trades in the CFD market. Some brokerage firms that offer CFDs do not require a minimum deposit.

Meanwhile, government-authorised brokers usually provide clients with quality security measures to protect traders’ accounts.

For example, Taurex, an FCA-authorised brokerage firm, holds client deposits in top-tier banks separate from the company’s operation fund to ensure their safety and accessibility.

Implement Risk Strategies

Whether you’re a newbie or an experienced trader, trading CFDs can be risky. That’s why many CFD traders follow strict risk management tactics.

One strategy is the 1% rule, which suggests that you should not put more than 1% of your current fund into a single trade.

Managing Risks

Again, CFD trading involves significant risk. Even if you get massive returns, you can only maintain your profit by selling and buying at the right opportunities.

You cannot always predict how market prices will change, so setting an effective risk management approach beforehand and sticking to it is essential.

Licensed brokers like Taurex provide risk warnings to their clients to help manage traders’ expectations.

Monitor Positions

CFD markets are highly volatile, so trade with your head, not your heart. You must pay close attention to charts indicating how the market has moved in the past and its potential current direction. 

What’s the Difference Between CFD and Share Trading?

The crucial difference between CFDs (or share CFDs) and share trading is that the former are leveraged while the latter involves non-leveraged assets. 

You take direct ownership of the asset when share trading (also known as share dealing). Consequently, you will have to pay the entire position value upfront.

What Determines Returns?

As in traditional stock trading, the trader’s position size and the number of points (pips) the market moves will determine returns (or losses) from CFD trades. 

Other aspects, such as leverage, market direction, and trade management, also play a significant role.

CFD Trading Essentials

Understanding the basic concepts of CFD, including leverage, margins, and market movement, can help you participate in the CFD market more confidently. The following sections offer more information about how the CFD system works.

You Can Go Long or Short With CFDs

Again, CFD trading aims to make correct predictions regarding a particular asset’s price movement. The price can go up or down. 

You buy contracts if you think the underlying asset’s price will increase and sell if they will likely decrease.

What Are Long and Short Positions?

Entering “long” or “short” positions are trading strategies referring to holding and letting go of a contract, respectively.

You go short (short sell) to profit from a market’s downward movement. You go long (buy) to take advantage of the instrument’s price increase.

CFD Trading Is Leveraged

Again, CFDs are leveraged products, meaning you only have to pay for a portion of the underlying asset’s current value to enter a position. Some call this practice margin trading since you must borrow money to execute trades.

The full position size, not the capital you invested, determines your trade’s loss or profit. 

You’ll Open a Leveraged Position With a Margin

CFD margin requirements differ according to the market you’re trading. Not every market requires the same margin rate. Check with your broker to determine these factors.

Can You Trade CFDs Without Leverage?

Trading CFDs always involves leverage. People with enough capital to cover large shares may opt out of leveraging positions.

CFDs Behave Similarly to Their Underlying Market

CFDs simulate their underlying asset’s market movement. As such, CFD prices rely heavily on the asset’s price increase or decrease.

This mechanism lets you profit greatly on trades using only a small portion of your capital. But it could work the other way around. 

You may also lose big because the trades are based on the full position, not the margin amount.

Is CFD Trading Right for You?

CFD trading can be an excellent option if you’re looking for a way to profit from rising and falling markets without incurring the costs of actual asset ownership.

However, despite the potential high returns from CFD trading, it can also be risky.

Taurex offers a free demo account so you can practise your trading methods before becoming a live trader.

Steps to Becoming a CFD Trader

The CFD market operates on basic principles you must grasp to trade effectively. These fundamentals lay the foundation for minimising losses and maximising returns.

Here are five steps you should learn to become a strategic CFD trader:

Find Out How CFDs Work

These instruments work by simulating or mimicking the underlying market. 

“Underlying” as a noun means the indices, shares, commodities, or other financial products on which derivative contracts like CFDs are based.

The underlying asset’s price dictates the derivative’s price. CFD traders lose or gain money depending on the share price movement.

Learn How CFD Profit and Loss Work

CFD loss or profit is calculated as the price difference from when you initiate your position to when you close it, multiplied by your total position size.

Find Out How to Place a CFD Trade

Choosing a market to trade in is the first step when opening a position. Your market projections usually determine which asset to trade once you pick one.

You should sell if you believe the asset’s price will decline (move downward). And you should buy if you think it will rise (move upward).

Your selected trading platform allows you to keep track of your open positions and click the “close” option to close them.

If you opened your position by buying, you could close it by selling the contract at its current selling price.

Learn About CFD Timeframes

With CFDs, you can trade with CFD spot or future markets, depending on your preferred market.

Spot trading is ideal for shorter-term trading because the spot price reflects the real-time asset price. 

Meanwhile, CFD futures are better suited for medium- to long-term trading, as they enable the consideration of price movements over defined periods.

Know the Costs When Trading CFDs

Aside from profit and loss, CFD transactions may involve additional costs. For example, CFD providers often charge commissions on CFD trades.

Some impose a general commission, while others charge a commission per trade. Other CFD trading-related costs include the following:

• Account management fees
• Bid offer spreads (the difference between an asset’s bid and ask prices)
• Daily and overnight financing fees
• Taxes (depending on the jurisdiction in which you and your broker operate)

Margins

Taurex offers different leverage ratios for margin trading based on the type of account:

CFD Leverage (Indicies & Commodities) up to:

• Standard: 20:1
• Pro: 20:1
• VIP: 20:1

Forex Leverage up to:

• Standard: 30:1
• Pro: 30:1
• VIP: 30:1

Spread and Commission

In CFD trading, the underlying instrument’s price is divided into two parts: the buy price (also known as the offer price) and the selling price (also known as the bid price). 

The difference between these two prices is called the CFD spread. Additionally, brokers may charge commissions for executing trades.

Choosing Your Contract Size

The term “contract size” refers to the quantity of underlying assets represented by a derivatives contract, such as a CFD.

Contract sizes simplify the trading process and define the traders’ responsibilities.

Choosing Your CFD Duration

CFDs do not expire, so you can choose when to close a trade. You should note that the CFD market is known for its high volatility. This scenario suggests that extending CFD durations for too long isn’t ideal.

CFDs and Dividends

CFD accounts are derivative investments speculating on price movements. However, they do not provide cash dividends. 

Instead, ‘dividend adjustments’ are applied to minimise the impact of price movements on dividend payments, with adjustments made on ex-dates in CFD accounts.

CFDs and the Regulator

Brokers operating legally in different countries have different regulatory bodies governing their operations. 

The U.K. has already been discussed. Here are examples of three other countries with regulatory agencies that monitor CFD trades:

• Australia: Australian Securities and Investment Commission (ASIC)
• Germany: Federal Financial Supervisory Authority
• Switzerland: Swiss Financial Market Supervisory Authority (FINMA)

Advantages and Disadvantages of CFD Trading

Making informed financial decisions requires understanding the advantages and disadvantages of CFD trading. 

CFD traders can effectively navigate the dynamic world of CFDs by evaluating each product’s potential benefits and drawbacks.

Advantages of CFD Trading

CFD trading offers several advantages. Here are some key points that highlight why you should consider CFDs as trading options: 

Multi-Asset Platform

With CFD trading, you can access the global market using only one platform.

Such platforms offer tools and resources to help you succeed in your CFD trading journey. These resources comprise news and commentary, webinars, technical indicators, and margin signals.

Trade Rising and Falling Markets

One of the benefits of CFD trading is potentially profiting from falling markets. 

In a CFD, the difference can be positive or negative. This scenario enables you to trade on the possibility of price increases (a “buy” or “long” order) or price decreases (a “sell” or “short” order).

Low Fees

Some brokers offering guaranteed stops do not charge a service fee or recover costs through other ways. If they do, the price is likely minimal.

No Stamp Duty

You may have to pay stamp duty depending on where you trade. Governments often place a stamp duty tax on real estate transfers or other assets.

24/5 Markets

CFDs also offer the advantage of being available 24 hours a day, five days a week. Hence, traders can still trade CFDs based on major stock market indices even if the underlying market has closed.

Disadvantages of CFD Trading

As appealing as CFDs are compared to traditional markets like stock exchanges, these derivatives have potential risks. 

For instance, the CFD market has fewer regulations than other markets. Thus, rather than looking at liquidity or popularity as indicators of trustworthiness, you should consider the broker’s financial strength, track record, and longevity.

Another drawback of CFD trading is that spreads can sometimes be a burden. You may have to pay the spread when taking or closing positions, reducing your potential profit.

How to Use CFDs for Hedging or How to Hedge With CFDs

Trading CFDs can be a great way to hedge (minimise loss risk) your portfolio because they are flexible and require only a small deposit. If your broker offers CFD trading, you can hedge your investment.

Suppose you want to trade the stocks of a large corporation, but the stock price falls. With CFDs, you can enter a short position and buy later at a lower price.

What Is Hedging?

Again, a hedge is a risk management practice you can implement to reduce losses. You hedge to protect your profit, especially in uncertain times.

Why Hedge With CFDs?

Highly-skilled traders use hedging as an essential risk management strategy. Your hedge position will benefit you if an investment unexpectedly goes against you.

CFD hedging allows you to protect your current portfolio by letting you sell short if you think the price will decrease.

CFD Trade Example

Imagine this: you buy 100 stock shares for £25 each, totalling £2,500 (minus additional transaction fees). Traditional trading will require you to pay that amount to enter a position. 

Meanwhile, CFD requires only a fraction of that amount (called the margin amount) to start a trade. So, if the margin requirement is just 5%, you only have to pay £125 to place a trade (£2,500 × 5%).

However, CFD trades lose the exact value of the spread size when the deal goes down. So, the stock has to rise by the same amount to break even.

CFD Trading on a Rising Market

An example: Say you think the price of gold will increase. You go long and buy five gold CFDs at its current price of £5,320.

The market gains 30 points to 5,350. You go short (close your trade) by selling your five contracts. When you exit your trade, you exchange the difference in the asset’s price from when you placed the trade (£5,320) to now (£5,350).

CFD Trading on a Falling Market

Another example: The FTSE 100 is at 4,000, but you expect it to fall as you suspect the U.K. earnings season wouldn’t be good. So, you sell five FTSE CFDs at 4,000.

Your forecast is correct, and the FTSE 100 falls to 3,930. When you sell CFDs, you exchange the difference between the asset’s price, but if the market falls, you make a profit, and if it rises, you lose.

The FTSE dropped 70 points, so you earn a specified amount for each of your five contracts. 

Tips for CFD Trading

CFDs are high-risk investments, so you should know when to buy and sell contracts without draining your capital.

One way to do so is by setting up limit orders when trading CFDs. The commands automatically close a position at a specified profit, so you don’t have to monitor the market constantly. 

A take-profit order can help reduce your risk of losing money if you maintain a winning position for too long.

Stop-loss orders can also help you minimise potential losses and lower CFD risks. If you set a stop-loss, your position will automatically close out if the asset’s price drops below a certain level.

Why Trade CFDs With Us?

Taurex is an FCA-authorised broker with decades of experience in online trading. Consequently, you can expect a secure and optimal CFD trading experience if you trade with us.

CFD Trading Courses and Resources

With an Everything Trading (ET) account, you can access various educational resources and trading tools. 

ET learning materials include webinars, ebooks, and courses to help you with your CFD trading decisions. 

FAQs

• What does CFD mean?

A CFD or contract for difference refers to an agreement between the trader and the CFD broker to exchange the difference between the underlying asset’s opening and closing prices.

• Which broker is best for CFD trading?

The best CFD brokers offer security, transparency, low spreads and costs, and exclusive trading services— qualities that a reputable broker like Taurex exhibits.

• Is Taurex a CFD broker?

Taurex allows traders to trade CFDs on stocks, forex, commodities, and metals.

Start trading with Taurex if you want competitive margins and spreads on CFDs.

• Should CFD brokers be illegal?

The answer to this question depends on what people expect from CFDs. For example, some countries ban CFD trading because they are OTC (over-the-counter) products, meaning these instruments do not go through regulated markets. 

• Is Taurex a trustworthy CFD broker?

Yes. Taurex is the trading name of Zenfinex Limited, authorised and regulated by the Financial Conduct Authority in the UK under registration number 816055.

• How much are CFD broker fees?

The amount for holding trades varies depending on the broker’s policies. Taurex’s non-trading fees, such as deposit and withdrawal payments, differ by region and payment method. 

• What is the regulation for CFD brokers?

Financial authorities regulate CFD brokers differently.

In the U.K., after consultation feedback, the Financial Conduct Authority (FCA) issues guidelines on how CFDs and CFD-like instruments are sold, marketed, and distributed.

• Is CFD trading legal?

The legality of trading CFDs largely depends on the jurisdiction you are trading in.

• How do you apply for an account with a CFD broker?

While CFD brokers differ slightly regarding creating a trading account, they usually follow similar procedures.

Choose an account type on Taurex’s official website to apply for an account.

Taurex requires proof of identification and other documents as a security measure.

Upon registering, fund your account based on your account type’s minimum requirements. Select a trading platform to start trading.

• What is the difference between CFDs and futures?

A futures contract expires when there is an obligation to sell or buy a security at a preset price. In contrast, a CFD based on an underlying asset has no expiration date.

• Do you pay taxes on CFD profits? How are CFDs taxed?

We don’t give tax advice. However, CFDs in the U.K. are generally free from stamp duty.

 If you’re considering investing in CFDs, we strongly recommend seeking legal, financial, and tax advice first.

• What is the difference between spread betting and CFD trading?

Traders can speculate in both directions using CFDs: long or short positions, based on the asset’s price rising or falling.

In spread betting, you bet on the direction of the price rather than trading a contract based on price differences.

• How much money do you need to start CFD trading?

The amount you need to trade CFDs varies depending on your financial goals and the CFD broker’s deposit requirements.

• Why do people lose money trading CFDs?

People lose money trading CFDs when the market does not favour their position. That’s why it’s crucial to trade with brokers that care about how their clients maintain capital.

For example, if you don’t act before a closeout level arrives, Taurex can automatically close your positions. 

With negative balance protection, your account balance will never drop below zero. 

• Is CFD trading good for beginners?

The answer to this question depends on how committed a newbie trader is to learn CFD trading. Active traders usually trade CFDs since they have the time to monitor the market closely. 

• Is trading CFDs the same as gambling?

CFDs are derivates where the buyer speculates that the underlying asset will rise or decline in value. However, unlike gambling, CFD trading isn’t based on pure luck but requires skills. 

• What are retail investor accounts?

CFD brokers allow retail clients (individual traders) to engage the CFD market through a retail investor account.

• Can you hold CFD positions long-term?

Yes, you can hold CFD positions for as long as you want. However, note that the CFD market is highly volatile. It is only sometimes ideal to hold CFDs for a short period.

• How do CFD providers like Taurex make money?

Taurex earns money primarily from spreads and commissions.

Other CFD brokers may also charge inactivity fees to recover the costs of keeping dormant accounts active.

• Does a CFD expire?

A CFD has no expiration date, and its value is usually the same as the underlying asset’s. 

• Can you trade CFDs from a share dealing account?

If your broker or account type allows trading CFDs, you can trade shares or CFDs. When you deal in stocks, you buy and sell the underlying securities.

• Does Taurex accept Bitcoin deposits?

Taurex requires real money to create a Standard, Pro, or VIP account.

• Is trading indices of the NASDAQ 100 available in Taurex?

Taurex offers CFD trading with NASDAQ 100 indices and other major indices, including S&P 500 and FTSE 100.

The NASDAQ 100 is an index of the top 100 most actively traded firms listed on the NASDAQ stock exchange.

• Do day traders trade CFDs?

Specific markets may restrict day trading or require a minimum capital requirement. 

CFD traders do not have to follow these limits and can day trade as they wish. 

• Should you use CFDs or invest?

The answer to this question depends on your overall trading goals.

CFDs are leveraged products. Market movements can magnify either profits or losses, depending on whether you’re on the right side of the market’s movement.

Meanwhile, investments usually involve holding positions for longer periods. 

• Can you sell and buy the same stock repeatedly?

As with the waiting period for selling a stock after buying it, there is no legal limit on how many times the same stock can be bought and sold on the same day. 

However, your broker may impose restrictions according to your account type, available capital, and regulations regarding trading patterns.

References

1. Capital Gains Tax: what you pay it on, rates and allowances https://www.gov.uk/capital-gains-tax/rates
2. CFD trading: US laws and alternative plays https://www.finder.com/cfd-trading
3. Contracts for differences https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-267.pdf
4. Nasdaq-100 Index https://www.nasdaq.com/solutions/nasdaq-100

The information provided in this article is for general informational purposes only and does not constitute financial advice. It is not intended to be a recommendation to buy or sell any financial instrument or engage in any investment activity.

While we strive to provide accurate and up-to-date information, we do not guarantee its completeness or accuracy. We rely on various sources for the information presented, and we cannot guarantee the reliability or accuracy of these sources.

The information provided here does not necessarily reflect the products or services offered by our company. Any mention of financial products or services is for informational purposes only and should not be considered an endorsement.

All investments involve risk, including the potential for loss of principal.

This information should not be considered as financial advice. You should always seek professional financial advice from a qualified advisor before making any investment decisions.