What are CFDs?
CFDs are tradeable instruments that track the price of underlying securities or assets.
A CFD trade occurs when a trader enters into a contract with their broker to buy or sell a particular underlying asset or security at a specific price. In doing so, the trader aims to speculate on price fluctuations that may occur in the window of time between when the contract is agreed upon and entered into force, and when it expires (or when the trade is closed).
request_quoteOwnership of underlying assets
When you purchase an asset like company stock, you become the owner of those actual shares. When purchasing a CFD, however, you never 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 (or neither, if the price remains flat). Profits are only realized if the trade is closed while the position is still profitable (losses work under the same principle – if the trade is unprofitable when closed, the loss becomes realized).
For example, if a trader buys a CFD on the EUR/USD pair and the contract price moves higher than the initial purchase price, the unrealized profit will be the difference between those two prices (minus any applicable trading costs).
A quick note about losses: It’s important to remember that realized losses can worsen in the event of a margin call, or a gap in a stop-loss order. This added risk exists because CFDs are traded from within a margin account, which has the potential to incur a negative balance due to the use of leverage.
How are CFDs different from stocks?
When purchasing a stock through an online broker, your broker holds the shares (or, share certificates) on your behalf. As the shareholder of record, you gain certain rights and privileges – such as voting and taking part in proxy meetings. You also become eligible to receive potential dividends.
CFD traders do not enjoy any such ownership rights. When you purchase a CFD, you do not own (or take delivery of) the actual underlying asset. CFDs are tradeable derivative instruments that reflect the price of an underlying asset – such as stocks.
sticky_note_2Note:
Some CFD brokers may offer you the ability to receive dividends in an attempt to mimic the trading of real (underlying) stocks.
Leverage: Though some traders can use a certain degree of leverage when trading shares (pattern day traders in the U.S., for example, can access up to 4:1 leverage), in most cases leverage is not available when trading cash equities (stocks). CFDs operate differently. CFD traders in the EU, for example, can access up to 5:1 leverage (reminder: CFDs are not available for trading in the U.S. or for U.S. residents).
Risk: Though it’s unlikely to see your portfolio plummet to zero when trading or investing in traditional underlying stocks, this is not true with share CFDs. CFDs are tradeable instruments that carry extreme risk; most retail CFD traders lose money. Leverage introduces additional risk that isn’t present when trading underlying stocks. When trading CFDs, it’s possible to lose your entire balance (or even go into the negative, in some cases).
How are CFDs different from forex?
The main difference between CFDs and forex (foreign exchange) is that CFDs are a type of instrument, whereas forex is an asset class. CFD traders speculate on price movements for a range of asset classes, but they never take ownership of the underlying assets. Forex traders, on the other hand, can – in some instances – take delivery of actual assets (in this case, currencies).
As a derivative instrument that tracks the price of an underlying asset or security, CFDs are non-deliverable. This means that CFDs are always cash-settled, with no possibility for delivery of any underlying asset.
With certain types of spot forex trading, traders can take delivery of the asset (currency). For example, a trader that buys the EUR/USD with the ability to take delivery of the asset will pay for the transaction in U.S. dollars – and will, in turn, receive euros in their account. By contrast, a CFD trader that 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.
All this being said, CFDs and forex behave similarly in many cases. Most retail forex trades operate much like CFD trades in that they are cash-settled; generally, retail forex traders do not take delivery of any assets or actual currency. Note: Both non-deliverable forex and forex CFDs carry risk, and regulatory protections will vary depending on your jurisdiction and/or country of residence.
Pros & Cons of CFD Trading
Pros
- A wide range of markets is available to CFD traders – including instruments that might not normally be available in your country of residence.
- When trading CFDs, you can go long or short; it’s fairly easy to open a short (sell) position.
- Most CFD trades are executed instantly, which means that there can be less risk of slippage (depending on your trading account and order type).
- Typically, CFD trading platforms have low trading fees and low commissions (relatively speaking).
Cons
- Trading with leverage from a margin account is risky; it’s possible to lose your entire balance while trading CFDs.
- CFD traders incur overnight fees when holding a position overnight (also known as carry charges).
- CFD traders own a contract – there’s no ownership of the asset itself. This means that CFD traders are also ineligible for benefits such a dividends and shareholder rights.
- CFD trades are subject to capital gains tax.
Are CFDs legal in the U.S.?
No, CFDs are not legal in the U.S., and CFD trading is not permitted for U.S. residents. Non-U.S. residents can trade CFDs with most forex brokers – as long as the broker accepts clients from your country of residence.
CFDs are considered a derivative in the U.S. and are therefore subject to the licensing requirements of the U.S. Commodity Futures Trading Commission (CFTC).
The CFTC also regulates the spot forex cash market. This means that U.S. residents who want to trade forex are required to do so with a U.S-regulated forex broker. Find a U.S.-regulated forex broker with our guide to the Best U.S. Forex Brokers.
U.S. residents may not be allowed to trade CFDs, but there are other exchange-traded products offered by U.S. brokers – such as forex, futures, options, and securities – that can provide similar exposure to underlying assets. For example, several U.S. forex brokers offer micro-futures contracts from the CME, which allow traders to speculate on indices, metals, commodities, and forex futures contracts.
Can CFD trading be profitable?
Yes, it’s possible for CFD trading to be profitable. That being said, it’s important to recognize that the overwhelming majority of CFD traders lose money each year. Dozens of CFD brokers publicly share their own statistics that confirm this point; many of the top CFD brokers warn that upwards of 70% of retail CFD accounts lose money each year (in some cases, that number climbs above 80%).
Successful CFD traders are able to show a profit over a large volume of trades, over long stretches of time. They do so by incorporating trading styles that minimize risk and strategies that aim to keep their average losses low relative to their average profits (though this is easier said than done).
Is CFD trading a good idea for beginners?
CFDs might not be the best choice for beginners, due to the extra risk that comes with trading with leverage from a margin account. Trading from a margin account – whether you are trading CFDs, forex, or other instruments or derivative products – is riskier than traditional investing. Trading with leverage can increase the risk/reward potential for your investment capital, and can even result in a negative balance (in rare cases).
If you already have experience with traditional investments like stocks or ETFs and you want to learn how to trade from a margin account, a demo account can be a good place to start. Demo accounts allow traders to experiment and familiarize themselves with trading software without risking any investment capital. The software is largely the same, but the demo account uses virtual funds; a “live” account is one where you fund the account with real money.
taskPro tip:
Should you decide to invest, be sure to risk no more than you can afford to lose, and start small before investing or trading serious amounts of capital.
What are the best CFD trading platforms?
Saxo Bank’s flagship suite of platforms for trading CFDs is our top pick for 2023. Including SaxoTraderGO for web and mobile and SaxoTraderPRO for desktop, Saxo Bank’s popular platform suite is loaded with trading tools, powerful charting, and cutting-edge research.
In the ForexBrokers.com full-length review of Saxo Bank, I describe its suite of platforms as having a “near-perfect balance of ease of use and advanced features.” Whether you use web or mobile with GO or you decide to stick to desktop with PRO, Saxo Bank provides an altogether excellent CFD trading experience.
Check out a gallery of screenshots from Saxo Bank's mobile trading app, taken by our research team during our product testing:
We also tested Saxo Bank's SaxoTraderGO web platform and SaxoTraderPRO desktop platform:
We’ve reviewed over 60 of the best brokers in the industry and tested dozens of CFD trading platforms. In addition to Saxo Bank, check out our top picks for CFD trading platforms in 2023:
Which brokers offer the most CFDs?
Saxo Bank offers the most CFDs, with nearly 60,000 available symbols across a wide range of asset classes. Cash equities, options, and exchange-traded securities are among the other instruments available to traders at Saxo Bank, and traders can choose CFDs for a given asset from within the trade ticket window. Read our full-length review of Saxo Bank.
IG is another top forex broker with an impressive offering of CFDs and tradeable instruments. Boasting nearly as many CFDs as Saxo Bank, IG offers an impressive range of instruments and multiple asset classes. Check out our full-length review of IG.
Also worth mentioning is Interactive Brokers, a highly rated forex broker that offers a massive number of trading venues and exchanges, as well as nearly 10,000 CFD markets. Learn more by checking out our full-length review of Interactive Brokers.
What is the best broker for trading CFDs in the UK?
IG holds the crown as the best broker for trading CFDs in the U.K. IG ranks at the top of nearly every category, with multiple trading platforms, powerful research tools, comprehensive financial markets education, and a substantial range of CFD markets and spread betting products. IG is highly trusted across the globe, and holds numerous regulatory licenses – including in the U.K. where it is regulated by the Financial Conduct Authority (FCA).
What CFD brokers charge the lowest fees?
The CFD brokers that charge the lowest fees are typically those that feature the lowest effective spreads. Effective spreads are determined by calculating the broker’s average spreads, and then factoring in any per-trade commissions. In 2023, Tickmill reigns supreme in this category, with the lowest effective spreads out of our list of the best brokers in the industry.
Here are the top 7 brokers for low-cost CFD trading in 2023:
ForexBrokers.com 2023 Overall Rankings
Now that you've read our guide to CFDs and seen our picks for the top seven CFD brokers, check out the ForexBrokers.com Overall Rankings. We've evaluated over 60 forex brokers, using a testing methodology that's based on 100+ data-driven variables and thousands of data points. Check out our full-length, in-depth forex broker reviews.
Popular Forex Guides
Methodology
At ForexBrokers.com, our reviews of online forex brokers and their products and services are based on our collected data as well as the observations and qualified opinions of our expert researchers. Each year we publish tens of thousands of words of research and detailed forex guides, and we monitor dozens of international regulator agencies (read more about how we calculate Trust Score here).
Our research team conducts thorough testing on a wide range of features, products, services, and tools (collecting and validating thousands of data points in the process). We test all available trading platforms for each broker – whether they are proprietary or come from third-party providers – and evaluate them based on a host of data-driven variables.
We also take an in-depth look at each broker’s commissions and fees, such as bid/ask spreads – including the average spread data for some of the most popular forex currency pairs. We research other trading costs, such as inactivity or custody fees, minimum deposit requirements, VIP rebates and/or discounts, and a range of other important fee-based data points.
Some of the other important research categories that are factored into our testing include mobile trading accessibility and capability, availability of market research and educational content, and each broker’s overall Trust Score.
Read our full explanation and accounting of our research and testing process to learn more about how we test.
Forex Risk Disclaimer
There is a very high degree of risk involved in trading securities. With respect to margin-based foreign exchange trading, off-exchange derivatives, and cryptocurrencies, there is considerable exposure to risk, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or related instrument. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses. Read more on forex trading risks.
About the Editorial Team
Steven Hatzakis
Steven Hatzakis is the Global Director of Research for ForexBrokers.com. Steven previously served as an Editor for Finance Magnates, where he authored over 1,000 published articles about the online finance industry. A forex industry expert and an active fintech and crypto researcher, Steven advises blockchain companies at the board level and holds a Series III license in the U.S. as a Commodity Trading Advisor (CTA).
Blain Reinkensmeyer
Blain Reinkensmeyer has 20 years of trading experience with over 2,500 trades placed during that time. He heads research for all U.S.-based brokerages on StockBrokers.com and is respected by executives as the leading expert covering the online broker industry. Blain’s insights have been featured in the New York Times, Wall Street Journal, Forbes, and the Chicago Tribune, among other media outlets.
John Bringans
John Bringans is the Senior Editor of ForexBrokers.com. An experienced media professional, John has close to a decade of editorial experience with a background that includes key leadership roles at global newsroom outlets. He holds a Bachelor’s Degree in English Literature from San Francisco State University, and conducts research on forex and the financial services industry while assisting in the production of content.
Joey Shadeck
Joey Shadeck is the Content Strategist and Research Analyst for ForexBrokers.com. He holds dual degrees in Finance and Marketing from Oakland University, and has been an active trader and investor for close to ten years. An industry veteran, Joey obtains and verifies data, conducts research, and analyzes and validates our content.
Trading Leveraged Products such as Forex and Derivatives may not be suitable for all investors as they carry a high degree of risk to your capital. Please ensure that you fully understand the risks involved, taking into account your investments objectives and level of experience, before trading, and if necessary, seek independent advice. Please read the full Risk Disclosure.
IG
CMC Markets
FOREX.com
XTB
FP Markets
Plus500
AvaTrade
BlackBull Markets
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TD Ameritrade
eToro
Swissquote
AvaTrade
FXCM
Plus500
Capital.com
XM Group
Pepperstone
OANDA
Admiral Markets
FP Markets
Markets.com
IC Markets
FxPro
Fineco Bank
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Tickmill
BlackBull Markets
DooPrime
Vantage
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Trading 212
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Trade Nation
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