Contracts for Difference (CFD) are financial derivative instruments that allow traders to profit from price movements without physically owning the underlying asset. The act of buying and selling CFDs is both popular and risky, all at once, and generally takes place off-exchange or in the over-the-counter (OTC) markets with online brokers. CFDs are offered for a wide range of financial asset types and classes that include FOREX, shares and cryptocurrencies, just to name a few.
In this short article, we will explain what CFDs are and how they work, dive into the pros and cons of trading CFDs, and demonstrate how CFDs are different from FOREX and stocks. However, for starters, our team of in-house researchers has conducted rigorous research and testing to find the best brokers for trading CFDs.
7 Best CFD Brokers and Trading Platforms in 2023
After a stringent research exercise, here is our list of the best CFD brokers and trading apps for 2023:
FXDD – 92.15 – Best Overall Broker.
ICM Capital – 91.10 – Best Deposit and Withdrawal Broker.
XTB – 85.55 – Best Customer Service Broker.
IG – 85.45 – Best Regulations Broker Plus Convenient Platform.
Think Markets – 80.05 – Aimed at the Audience of Traders.
FXDD received the highest score in our survey (92.15). One of the first FOREX companies to offer a credit card in order to allow traders to withdraw their profits, this New York-based company has the UK's FCA license under its belt. It also has a rich portfolio of assets, offers a relatively low spread, in addition to the MetaTrader4 (MT4) platform. Further, it has excellent and fast customer service, and also offers traders a variety of ways to deposit money.
ICM Capital is considered the industry leader in deposits and withdrawals, whereby each withdrawal does not take more than five business days. Moreover, the company offers its customers a handy credit card to withdraw their profits, in addition to enabling customers to use various deposit methods. The company, which is licensed by the UK's FCA, has several branches around the world. Among other things, it has a rich portfolio of assets, especially stocks, offers a low spread, as well as the ability to use MT4.
What distinguishes XTB is the fact that it offers the best customer experience among all the companies we have surveyed. Indeed, it boasts the fastest response rate from all the companies under investigation. This is especially relevant, since the market is always on-the-go, and so you need to act fast. XTB offers lots of asset classes, as well as the ability to use the MT4 trading platform. Finally, it maintains a relatively low spread, which is suitable for quick deals.
IG is arguably the best broker when it comes to security and trust, boasting, as it does, licenses from 10 regulatory bodies, including the all-important FCA from the UK. The company is also a bank and is a publicly traded company in London. It is known for offering more than 10,000 asset classes of currencies, commodities, future contracts, ETFs, indices, cryptocurrencies etc. Further, it has its own state-of-the-art trading platform and offers a relatively low spread.
Saxobank is considered one of the best investment banks in the area of financial markets and currencies, as it offers the very best trading platform and tools from all the companies we have reviewed. Meanwhile, its spread is very low and, as such, suitable for short-term deals; and it offers a large number of asset classes, including currencies, commodities, indices etc. Finally, its customer service is excellent and very responsive to traders' needs.
CMC Markets is thought of as one the best companies, offering some 9,000 asset classes that encompass currencies, commodities, indices, cryptocurrencies, bonds and stocks. The company offers a relatively low spread, the MT4 platform, and fast customer service. It is most suited for traders looking for diversity in asset classes.
Originally founded in New Zealand in 2010, and moving to Australia within the space of their first two years, Think Markets is a global online brokerage focusing on FOREX and CFD trading. In addition to a range of major and minor currency pairs. Think Markets has an array of CFDs on offer. This includes indices, as well as hard and soft commodities.
As noted in the introduction, CFDs are tradable instruments that enable you to speculate on the underlying price of securities or assets without actually owning them. You may be wondering what it actually means to speculate on the underlying price. In simple terms, you are predicting the future value of an asset and you are so sure of your prediction that you are putting your money on the table as a wager it will happen. Your broker takes your money and places the wager on your behalf. If your prediction comes true, you make money; but if it does not, you lose out.
A CFD trade is in place after a trader has inked a contract with their broker to buy or sell a particular underlying asset or security at a specific future price, which is different from the current price. By doing so, the trader speculates on price fluctuations that may occur in the “window” of time between when the contract takes effect and when it expires (or when the trade is finally closed).
Ownership of Underlying Assets
In sharp contrast to the process of purchasing asset classes, such as company stock, where you become the owner of those equity shares, when you buy a CFD, younever own the underlying asset.
As the price of the underlying asset fluctuates, the CFD trader will experience either an unrealized profit or an unrealized loss. A CFD trader can, therefore, experience one of three scenarios. If the trade is closed while the position is still profitable, a profit will be realized. Likewise, if the trade is unprofitable when closed, the loss becomes realized. Finally, neither a profit or loss will occur if the price remains flat.
In layman’s language, if a trader buys a CFD on the EUR/USD pair and the contract price moves higher than had been paid for initially, the unrealized profit will be the difference between those two prices, minus of course any applicable trading costs the broker may charge.
How do CFDs Work?
CFDs are a good option if you are looking for a financial asset to trade in today's retail marketplace. It is a trading method that is supported by most brokers, and you can use them to trade FOREX, stocks, indices, commodities and cryptocurrencies.
CFDs are a good trading method to use to trade with leverage as you can gain exposure to a larger position than your initial investment. Another reason they can be attractive is because CFDs typically offer lower fees and commissions compared to other forms of trading, such as futures or options. This can help you keep your costs in check.
They are flexible instruments that allow you to open and close positions at any time and use them in conjunction with a variety of trading strategies, such as scalping, day trading, or swing trading. If you are looking for a flexible, accessible and cost-effective way to trade a range of different markets and asset classes, CFDs may be for you.
How to Choose the Best CFD Broker?
You cannot trade CFDs without the help of a broker. This is because brokers provide the trading platform and act as intermediaries to help you access the financial markets. The broker acts as the counterparty to the CFD trade and sets the terms of the contract. The broker is in charge of placing a margin requirement and how much leverage you can utilize on the trade. Remember that when trading CFDs, you must always select a reputable and regulated broker that offers a user-friendly trading platform. As always, you should be looking for competitive fees and commissions, not to mention dependable customer support.
In Which Countries Can you Trade CFDs?
CFD trading is perfectly legal in many markets around the world. However, not all countries treat it the same, with some implementing more strict rules than others. Certain countries restrict how much leverage brokers can offer for CFD trading. Other countries, most notably the US, have outright bans on CFD trading.
Meanwhile, some European countries have firm restrictions on CFD trading. CFD trading in Europe is regulated by the European Securities and Markets Authority (ESMA), which has imposed restrictions on the marketing and sale of CFDs to retail investors in the EU since August 2018. European traders will find that they must abide by CFD trading guidelines, such as:
Leverage limits: Traders do not have access to leverage on FOREX pairs higher than 1:30. For minor pairs, gold and most indices, traders can only receive leverage of 1:20. Minor indices, commodities and crypto leverage are capped at 1:10, while equities are capped at 1:5.
Negative balance protection: brokers that provide CFD trading must ensure that clients cannot lose more than their account balance.
Margin close-out: According to this rule, brokers must freeze a client's position when their funds drop below a certain percentage of the margin required to maintain their open positions.
Marketing and distribution: European brokers must be alert to hold back from encouraging trading via bonuses and promotions, and they are obliged to post clear warnings about the dangers of CFDs, such as their high leverage, volatility, and the potential for trader losses exceeding the initial investment.
Pros and Cons of CFD Trading
CFDs have several pros and cons, as outlined below:
CFD traders have a wide range of markets available to them, including instruments that might not necessarily be available in their country of residence.
With CFDs, you can easily go long (buy) and short (sell), freely switching between the two.
CFD trades, executed almost instantly as they are, carry less-to-little risk of slippage.
Compared to trading underlying shares, CFD trading platforms tend to have relatively low trading fees and reduced commission charges.
The risks associated with trading with leverage from a margin account are exponentially heightened. Indeed, it is possible to lose your entire balance or even go in the red while trading CFDs.
When holding a position overnight, CFD traders carry charges that may become prohibitive with time.
With CFDs, traders are ineligible for such benefits as dividends and shareholder rights.
In most Western economies, CFD trades are subject to a capital gains tax.
How are CFDs Different from Stocks?
This is a question that new traders often ask. When you buy stocks through an online broker, your broker holds these shares on your behalf. Being the “shareholder of record,” you gain certain rights and privileges. These range from enjoying voting rights and taking part in proxy company meetings to also becoming eligible to receive potential dividends.
While CFD traders do not generally enjoy any such rights, in some rare instances CFD brokers may offer traders the ability to receive dividends, akin to the trading of real (underlying) stocks.
Leverage: This is one key area where CFDs operate very differently to trading cash equities (stocks). Indeed, CFD traders can access leverage while in most cases leverage is not available when trading cash stocks.
Risk: Share CFDs are much riskier than trading in traditional underlying stocks. This is partly because of the leverage often offered to CFD traders and not offered to those investing in traditional stocks. Indeed, CFD traders can see their entire balance wiped out or even go into the negative, in some cases.
How are CFDs Different from FOREX?
FOREX is an asset class whereas CFDs are a type of instrument. As well, FOREX traders take delivery of actual assets (in this case, fiat currencies) while CFD traders speculate on price movements for a range of asset classes without taking ownership of the underlying assets.
By virtue of their definition of as a derivative instrument that tracks the price of an underlying asset or security, CFDs are non-deliverable and are always cash-settled. This means there is no possibility for delivery of any underlying asset.
Here is an example to illustrate this last point. A trader who purchases the EUR/USD currency pair settles the transaction in US dollars and gets euros in exchange. On the other hand, a CFD trader who buys the EUR/USD cannot take delivery of any currency and can only close the position by selling an equivalent amount of EUR/USD to exit the trade. The aim is that there is a positive difference (favoring the trader) in the value of the currency pair between the time they bought it and when they sold it.
Notwithstanding, CFDs and FOREX do share some similarities, including the fact that most retail FOREX trades operate much like CFD trades in that they are cash-settled.
Can CFD Trading be Profitable?
The quick answer is yes, it is possible. The longer answer, however, is that most CFD traders will end up losing money each year. Some studies warn that upward of 70% of retail CFD accounts lose money every year with that number climbing above 80% in more extreme cases.
Successful CFD traders can show a profit over a large volume of trades, over long stretches of time. They do this by incorporating trading styles that minimize risk on the one hand, and strategies that aim to keep their average losses low relative to their average profits (though this is not always easy to achieve) on the other.
Is CFD Trading a Good Idea for Beginners?
No, it is not. CFDs are better suited to experienced traders because of the extra risks that come with trading with leverage from a margin account. For beginner traders, trading with leverage can increase the risk/reward potential for their investment capital, and can even result in zero or a negative balance (in rare cases). However, if you already have experience with traditional investments, like stocks or Exchange Traded Funds (ETF), and you want to learn how to trade from a margin account, a demo account can be the best way to go. Demo accounts allow traders to use virtual funds in contrast to a live account where you fund the account with real money.
Which Broker Offers the Most CFDs?
Our research has shown that IG offers the most CFDs, with an impressive range of CFDs and other tradable instruments across a wide array of asset classes. These include FOREX, cash equities, options, and exchange-traded securities, just to name a few of theinstruments available to traders at IG.
Which CFD Broker Charges the Lowest Fees?
Typically, CFD brokers that charge the lowest fees are those that also levy the lowest effective spreads, determined simply by calculating the broker’s average spreads, and then factoring in any per-trade commissions. In 2023, our research found that Tickmill reigned supreme in this category, with the lowest effective spreads out of our list of the best brokers in the industry.
The debate over the concept and use of CFDs continues to rage in financial circles. Unlike investing in stocks or FOREX, CFDs have no value rather than allowing users to speculate on prices of the underlying assets. While CFDs are generally better suited for experienced traders, due mainly to the risks that come with leveraged trading, they are in some respects much easier and more flexible than trading stocks, FOREX and commodities outright. After all, a CFD trading account is still the best way for traders to get access to nearly all financial markets and the most financial assets in global markets.
When compared to other forms of trading, some of the benefits of CFD trading include low minimum deposit, high leverage ratio, low trading costs and the ability to take long and short positionswithout having to adhere to strict margin requirements. So, if you are planning to trade FOREX currency pairs and get access to other financial instruments, CFD trading might be the best solution for you. In this regard, the list of brokers we presented at the start of this article can be very handy.
The team at Arincen collected more than 120 pieces of data covering in excess of 100 licensed FOREX companies. Data collection was done in three ways:
Other Websites that have ranked FOREX companies.
A survey questionnaire (referred to here as Survey “1”) we had sent to the companies invited to participate in the exercise.
We have identified 12 criteria for our assessment, each containing several aspects and carrying its own relative weight. These include licensing, deposits and withdrawals, number of assets etc.
Afterward we validated the data by:
Registering with FOREX companies as a secret shopper and/or as Arincen.
Survey number “2,” in which we asked these companies’ customers for important feedback and past experience.
The next step saw us evaluate and rank each company, relying on the hard work of 15 Arincen employees. We were very careful in ensuring the most accurate assessment possible, including taking into account different languages, as well as the various mobile-app operating systems, e.g., Apple, Samsung etc.
To add credibility to our research project, we sent a final and third survey (referred to here as Survey “3”) to enable participating FOREX companies evaluate our own research and whether it accurately reflects the realities on the ground. We were fortunate enough to receive a mark of 9.9 out of 10! We have kept to a minimum the margin of error, which stood at a measly 1%. To learn more on how we came up with the evaluation, please click here.
What are CFDs?
CFDs are financial instruments that allow traders to speculate on the rising or falling prices of underlying assets without actually owning the assets themselves. A trader can initiate a contract with a broker to exchange the price difference of an underlying asset at a time in the future. In other words, the trader does not own the asset outright, but signs an agreement with a broker that on a defined date in the future, if the asset in question has lost or gained value in any direction, either the broker pays the trader, or the trader pays the broker. It takes a great deal of skill for the average trader to predict with any reliability how respective currencies, stocks or commodities will change in value over time, making CFD trading a highly risky business.
Can CFD trading be profitable?
Yes, CFD trading can be profitable and some investors can reap handsome profits when trading these financial products. However, all this comes at a cost as the oft-leveraged CFDs are very risky instruments. Leverage refers to the loan extended by the broker, which allows the trader to invest a much larger amount of money than they actually own. With over three quarters of retail trading accounts losing money when trading CFDs, these instruments are by no means a guarantee for getting rich over night.
Are CFDs good for beginners?
CFDs are high-risk instruments and are, therefore, not recommended for beginners. CFDs are very risky because they are leveraged products. Leverage in this case means that you trade with your own money plus the funds your broker lends you. While you can open much larger positions this way, you can magnify both your profits and your losses. CFDs are widely used by experienced traders with a deep understanding of financial markets and investment strategies. As we had argued earlier in the article, for absolute beginners, it makes more sense to open a CFD trade demo account.
What to look for in a CFD broker?
As you narrow the list of CFD brokers from which you want to choose, it is important to consider a number of factors, ranging from regulation, costs and tradable asset classes, to the trading platforms available.
A well-regulated broker ensures the safety of your funds from internal company fraud or bankruptcy. Always look out for brokers that are regulated by tier-1 watchdogs, such as the Financial Conduct Authority (FCA) in the UK and the Australian Securities and Investments Commission (ASIC) in Australia.
As for costs, it is important to keep an eye on the various costs associated with each CFD trade in order to keep them in check. These include the spread, overnight holding costs, and commissions.
When it comes to tradable asset classes and markets, you are advised to pick the broker that can give you the widest choice availability. Some underlying assets you can trade include stocks, indices, commodities, fiat currencies, cryptocurrencies and ETFs.
Finally, always look for an easy-to-use trading platform that offers intuitive trading software, fast execution, good trading tools, and an order-management system. Otherwise, and if these important prerequisites do not prevail, you are risking losing out on profits.
The Editorial Department at Arincen makes an important contribution to the world-class content that can be found on the site. Arincen’s Head of Content and Chief Economist Marwan A. Kardoosh brings with him over 24 years of experience working in the...