Trading CFDs for UK investors

The FTSE and Dow Jones Index may make the stock market look accessible, transparent and, crucially, easy to master.
Ad Feature by Compare Forex Brokers
Published 16th Jul 2021, 08:09 BST
Just like when buying a house or a car from a choice of brands, not every brokerage offers the same standard of service or even the same product rangeJust like when buying a house or a car from a choice of brands, not every brokerage offers the same standard of service or even the same product range
Just like when buying a house or a car from a choice of brands, not every brokerage offers the same standard of service or even the same product range

But Forex trading is a whole new level of skill, one that may offer tantalising rewards for the few, but which puts capital at risk for the vast majority. In fact, well on the way to 80 per cent of traders lose their money.*

Simple lesson? Don’t invest what you can’t afford to lose, and don’t spend a penny till you’ve done your research and know exactly what you are getting into.

Trading CFDs for UK investors

One of the methods UK traders most want to try out is trading CFDs, or contract for difference. Here you will have a buyer and a seller, who enter into a contract. The buyer agrees to pay the seller the difference between the current value of their asset, and its value at the time the contract is up.

If the figure goes up, the seller makes a profit. If that figure goes down into negative equity at the time the contract finishes, the seller makes a loss, even if up until that time it was on target to make a decent profit. Calculate in fees etc, and you can see just how risky a speculation this is.

CFDs were once the province of hedge funds and high-end traders, but more and more ‘hobby traders’ are speculating on the markets with CFDs, moving these assets, or shares, around in the home of finding an elusive profit.

How many kinds of CFDs are out there?

If it wasn’t already a complicated system for an untrained newbie to discover, there’s lots to learn about CFDs themselves, not least of all that they are not just a single entity but a variety of contractually saleable items, all of which are open to the volatility of the markets.

Most people will have heard of shares – where you basically trade in a tiny part of a business. Then there are commodities, the raw components that are sold on global markets, like copper, coffee and such like. CFDs are also used in the Foreign Exchange market (Forex), where speculators buy and sell currency, trying to predict the markets on the up versus those in freefall, in the hope of buying cheap and selling on for a profit.

The skill is in correctly estimating when’s a good time to buy in, and when’s the right time to sell. There’s a reason any good broker’s website will be FCA-regulated and amply covered in warnings – it is very, very hard to make a profit, and for most traders you can expect to lose much if not all your money.

How to choose a good CFD broker in the UK

Just like when buying a house or a car from a choice of brands, not every brokerage offers the same standard of service or even the same product range. A site like Compare Forex Brokers helps to untangle the web of information available online, and has developed its own comparison mechanism to rate those available.

It advises people to choose one that is FCA-regulated with offices within the UK. Then you need to choose based on your own knowledge and skill level, and what you hope to do with it. Don’t feel embarrassed about choosing a site aimed at beginners, at least until you are more comfortable and confident.

Then check what restrictions cover each kind of brokerage – for example, no crypto trading, reduced leverage etc, and ensure you fully understand the pitfalls of each before committing your money to any. Check what restrictions and licences each has, ideally on a site which lets you compare between brokers.

*Before investing in the stockmarket or currency trading it is recommended you take independent financial advice. Be aware the values can go down as well as up, and a profit is not guaranteed.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.