CFDs (Contract for Differences) are a very easy and flexible way of investing and trading just about all asset classes. CFDs allow you to trade stocks, currencies, commodities, stock indices, ETFs, and cryptocurrencies, without needing to physically own the underlying asset.
This combined with the use of leverage and the ability to short sell (short trading) makes CFD trading extremely flexible and versatile for both retail and professional traders and investors.
In this article addressing CFDs and CFD trading, we will touch upon the common issues related to this relatively modern form of trading and investing.
What is a Contract for Difference (CFD)?
CFDs are financial differential contracts that allow you to speculate on price movements in an underlying instrument.
You can trade the CFD without having to physically own the underlying instrument itself as normally is not the case with most tradable equities.
In other words, you own the right to the price movement, but you do not “physically” own the instruments you choose to trade.
Of course, it would be very unpractical if you had to buy physical oil barrels every time you were to trade in oil…
Furthermore, CFDs are traded using margin trading.
This means that that you only have to deposit a relatively small percentage of the actual trade size in order to be able to trade your desired instruments.
The required margin for each financial instrument varies from one asset class to another.
CFD Trading within the UK and EU normally allows you to leverage single shares up to five times.
In other words, for a CFD trade with stocks of EUR 50 000 in exposure, you only have to provide a margin/collateral of EUR 10 000.
CFDs also allow you to take advantage of shorting possibilities. Hence, you can profit from the price of an instrument depreciating in value (Stock price falling, the value of a commodity or a currency dropping, etc.).
Benefits of CFD Trading
CFD trading is extremely flexible regardless of whether you are trading CFDs on stocks, indices, currencies, or any of the other available asset classes.
Once you have started CFD trading, you will very quickly come to understand the many benefits of investing using CFDs as your investment tool.
CFDs mirror the underlying financial instruments/markets so that a CFD will always evolve equally with the underlying financial instrument that it mirrors (this could be stocks, currencies, indices, oil, ETFs, cryptocurrencies, etc.).
Furthermore, CFD trading does not take physical delivery of the underlying instruments so that one, therefore, does not need any kind of traditional securities account, currency account, crypto wallet, or the likes of such.
CFD trading differs from traditional investments in many ways.
All you need is a trading account with a CFD online broker. All your CFD trading takes place in a single trading account where gains and losses are settled on an ongoing basis so that you at any given time have a complete overview of all your positions and the value development of your CFD investment.
CFD trading differs mostly from traditional securities trading in that it is traded on margin. In other words, you can apply leverage to your investments.
This means that with leveraged CFD trading you only need to have a proportionately small sum available on your CFD account in order to trade a lot larger amounts.
This is what is often referred to as margin trading.
CFD trading allows you to buy, to sell short in all the world’s markets from one single trading account using the trading platform of your own preference ( Skilling offers Skilling Trader, cTrader, MT4 and TradingView all from the same account).
Whether you’re buying stocks, buying Bitcoin, or trading currencies, -CFD trading is suitable for trading all asset classes regardless of you being a professional -or a retail investor.
You can trade CFD on cryptocurrencies safely without worrying about where they are stored as you do not need a crypto-wallet upon trading crypto CFDs.
Further, very many (crypto) traders seek to trade with a broker that is licensed and regulated by the financial authorities as a lot of the crypto exchanges to a very low degree abide to the rules and regulations of the financial markets.
CFD trading allows for you to invest smarter and make better use of your capital by taking advantage of the leverage opportunities that CFD trading provides to diverse more and/or take larger positions.
Using a licensed CFD broker who is regulated by its respective financial supervisory authorities you can rest assured of your funds being safe.
CFD trading today has become a form of investment tool suitable for all types of traders and investors.
History behind CFD Trading
CFD and CFD trading was originally initiated in the United Kingdom among professional investors and traders in the early 1990s.
This is to be exposed in the financial markets without having to physically take delivery of the various financial instruments on their various stock accounts, currency accounts, and other types of securities accounts.
By establishing a single CFD trading account, they were able to gather all their exposures across all asset classes while only having to deposit margin as collateral for just a fraction of the size of their portfolios.
CFD trading was also used to avoid the so-called stamp duty (England and Ireland) and further because CFDs were traded on margin, the instrument was very suitable for active traders who typically bought and sold assets very frequently.
These traders would make use of CFDs to take on large and frequent CFD positions without ever having to physically settle the actual positions on their respective trading accounts.
Since just about everything in practice can be traded using CFDs, this was (and still is) an extremely flexible and cost-effective way of trading and investing, while at the same time keeping all your positions in one single account.
CFD trading on stocks, indices, currencies, cryptocurrencies, and precious metals (gold, silver, copper, etc.), oil, and gas.
Everything was kept in the same trading account, and with only a fraction of the portfolio value needed as collateral, CFD trading was immediately a success with professional traders.
It was first at the beginning of the century CFD brokerages began to make CFD trading available and to offer CFDs to non-professional investors.
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 made a huge impact on online trading.
Today absolutely anyone can make use of CFD trading and invest and trade in global securities.
These days you can buy shares in publicly traded companies, indices, ETFs, currencies, cryptocurrencies, oil, gold, and a lot more. Even so-called Fan Tokens are now available for anyone to invest and trade using CFDs.
CFD for Beginners
Investing and trading for beginners is with the help of CFD s a lot easier than one might think.
Although CFD trading makes it possible to trade and invest in just about everything between heaven and earth, it is not automatically so that you ought to do so…
Very often we find that those who open a CFD trading account for the first time benefit a lot from trading and investing in assets they already know or in assets they have some kind of knowledge or relationship with
If you are a beginner in trading and investments altogether, trading cautiously applies equally to CFD trading.
Start your CFD trading cautiously, and wait until after some time when you feel comfortable and confident in both the trading platform and the trading in general before taking any larger positions and investing in new asset classes.
Learn to trade CFDs
There are a number of CFD courses and teaching sites within CFD brokes for you to better understand and to learn how to trade CFDs online.
Our experience, however, is that baby steps tend to work out fine for most beginners.
If you are to invest and possibly learn trading, nothing beats practical experience. This, of course, also applies to CFD trading…
Everyone fails to some degree in the beginning. Failure, and dealing with failure are also a significant part of learning how to trade.
What not to do, -and learning through your own experience is pretty much unbeatable in the process of learning new things, and CFD trading and investments are (naturally) no exception.
The most important thing to deal with as a CFD novice is to not use too much leverage, and not to open too many positions at once.
Further, try to plan your CFD trades so that you always have a clear strategy on what you should do regardless of the trades doing as intended or not…
Ahead of any CFD trade it is important to know when you are to take profits, -and or losses. Also, to exercise strict discipline on this strategy (possibly through the use of stop-loss and take-profit orders)…
CFD Daytrading
Many day traders trade CFDs for all of their trading and investments, and this is not without good cause.
CFDs ability to both buy and short sell, the automatic use of leverage that enables traders to be able to open more and larger positions, and the fact that in practice one does not need anything but a single CFD trading account in order to get started has made CFD trading extremely popular worldwide.
Needing only one single CFD trading platform in order to trade everything desirable across all asset classes has and in all the world’s markets has fortified CFD trading as the preferred investment vehicle for millions of traders and investors around the world.
CFD trading works very well for both day trading and other trading strategies for both those with and without much experience in trading and investments.
Whether you as a trader speculate in currencies or cryptocurrencies or perhaps do long-term or short-term trading with indices, oil, or gold, you will soon discover that CFD trading is very convenient and easy to both understand and use in practice.
Short Selling using CFDs
Investors who trade CFDs also have the option of selling short
This is often referred to as shorting and short-selling.
Short selling can be done just as easily as any other trade in the almost endless range of trading opportunities that CFDs provide.
Short selling, short trading, or ‘going short’ are all different expressions of selling assets one does not possess.
These assets could be shares, currencies, commodities, indices, etc., and the reasoning behind short selling is that the seller typically believes that the value of the short-sold asset is about to, or in the (near) future will diminish, and the investor will therefore later be in a position to buy back the asset in question at a lower price.
CFDs are perhaps the most suitable way for most people to short sell securities because of the enormous flexibility of the CFDs.
Short-selling equities, indices, currencies, and commodities are some of the most widely used trading tools in CFD trading.
Example:
Let’s say you sell an oil-related share like BP at a price of GBP 15 because you believe that the BP stock will depreciate (as a result of, for example, a steep fall in oil prices).
Given that you get it right, and the price of the BP stock then drops to a price of GBP 10, and you then buy the previously short-sold shares back.
You have had a price movement of GBP 5 on this drop in the share price.
Many investors and traders choose to use CFD trading for short trading with indices and commodities as it can often seem easier to predict the overall direction of the whole market rather than to assess the price movements of individual stocks in the same way.
Shorting single stocks carries significantly more risk than shorting stock indices as this requires much more specific knowledge about individual stocks as opposed to predicting the overall direction of the stock market represented in a stock index.
You can read more about short-selling stocks and investments by the use of short selling of other financial instruments in the article CFDs and short selling.
Leverage and CFDs
CFDs are traded on margin so that you only need a proportionately low amount in your trading account as collateral in order to trade far larger amounts.
How much leverage you can use, depends on the asset class and where your broker is regulated.
Brokers regulated within EU/EEA offer leverage up to 1:30.
This means that if, for example, you have EUR 10,000 deposited in your trading account, you are able to open CFD positions upwards of EUR 300,000.
Brokers regulated outside of EU/EAA usually offer leverage up to 1:500.
Choosing The Right CFD Broker
No CFD broker are the best at absolutely everything, but some are very good in very many areas.
As a European citizen, there are often no obvious reasons to choose a CFD broker who is not licensed either in an EEA state or who is permitted to conduct cross-border activities into that state from another EEA state.
Client service in your own language and trading platform(s) in your language are also factors many traders prefer upon choosing an online broker.
Furthermore, the range of available instruments in the different trading platforms is of course a very important factor when choosing a broker.
If you know that you are going to invest and trade heavily with let’s say US stocks, it is obviously a good idea to make sure that the chosen CFD broker actually offers these shares…
Furthermore, opening a CFD trading account in your own currency ensures that you avoid unnecessary exchange costs and currency risk that would naturally arise from having a trading account denominated in another currency than your own.
Find out which broker is right for you and open a trading account with one of our most recommended brokers here.
The best CFD trading platform
For beginners – Skilling Trader
If you are a novice in trading the most important thing for you in terms of choosing a trading platform is that the trading platform you start using is for your CFD trading is as easy and intuitive as possible.
The Nordic tin-tech broker Skilling has developed its own trading platform which is by far the easiest and most intuitive we have ever used.
The trading platform offers a full overview dashboard, 25+ languages combined with a Trade Assistant that you can choose to use that will guide you through your trades using baby steps in a very easy and understandable manner.
The Skilling Trade Assistant offers a detailed step-by-step guide as you carry out all the steps of your trades for as long as you feel the need for it.
Spotware cTrader – a sophisticated trading platform
If you have any experience with CFD trading or online trading in other securities, the cTrader platform developed by the company Spotware is a very good option in terms of trading platforms..
With the cTrader trading platform from Spotware, you will have full access to all the trading tools you might desire.
This while the platform is still very much more user-friendly than what is normal for such a sophisticated and extensive trading platform.
cTrader offers an intuitive and almost self-educating trading experience.
This is a powerful trading platform with loads of advanced features, such as algorithm-based trading, often called algo trading.
cTrader’s cCopy is also a very popular feature that allows for you to automatically copy other traders. Here you can read more about copytrading and cCopy.
cTrader offers all the order types and features you can imagine, and as many technical indicators and chart options there is.
All the trading tools and various smart features of the cTrader trading platform is educational for
both novices and semi-experienced traders.
Skilling is the only online broker in the world that has a seamless integration with cTrader so that you can trade on multiple world-leading platforms from one single account.
The Skilling integration with cTrader contributed massively in putting the Nordic fin-tech broker on the international tech scene, and the broker has won considerable publicity and industry credibility due to this integration.
MT4 – Metatrader4 MT4 – The most popular trading platform ever!
MT4 – The industry standard of trading platforms. During the past 15-20 years MT4 is the by far most widely used trading platform for CFDs and foreign exchange trading globally.
With countless features and endless so-called plug-ins, the MT4 trading platform developed by Metaquotes is the closest you’ll get 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 traders and investors have in terms of user experience today.
Metaquotes, the developer of Metatrader4 (MT4) launched their (at the time) newly developed MT5 trading platform many years ago for this trading platform to take over from the MT4 platform.
Long story made short, -traders around the world were not impressed and chose not to upgrade. They are still using the MT4 trading platform like MT5 never existed…
MT4 continues to be the industry standard trading platform for currencies and CFD trading for those users who make use of the most advanced trading tools.
The fact that all the various functions that the MT4 trading platform offers are not always found necessary for the vast majority of traders does not seem to matter to much…
If you want to test the MT4 trading platform, we recommend that you use a broker that at the same time 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 the CFD broker as you might not like the usability of the MT4 platform.
The TradingView platform
We have been informed that Skilling early in the first quarter of 2022 are to also offer the TradingView platform to its clients.
Once again, the Nordic broker launches another super popular feature, and we are sure clients will enjoy vastly from being able to trade from 4(!) different trading platforms while in the comfort of not having to swap between accounts with multiple brokers.
Stay tuned for more info on this.
Not sure of what trading platform you prefer?
Simply ‘jump between’ the various platforms you want to use from your Skilling account:
If you want to open a CFD trading account, this only takes a few minutes, and you are up and running with a minimum deposit of only EUR/GBP/USD 100.
You can also open a demo account to familiarize yourself with the different CFD trading platforms and practice trading on this before you choose to make a deposit.
