1. Home
2. Day Trading in the UK

CFD Trading In The UK

Written By

Jemma Grist

Written By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

» Jemma Grist Profile Page

Edited By

Tobias Robinson

Edited By

Tobias Robinson

Tobias is a partner at DayTrading.com, director of a UK limited company and active trader. He has over 25 years of experience in the financial industry and contributed via CySec to the regulatory response to digital options and CFD trading in Europe. Toby’s expertise and dedication to financial education make him a trusted voice in the industry, including a BBC investigation into digital options.

» Tobias Robinson Profile Page

Fact Checked By

William Berg

Fact Checked By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

» William Berg Profile Page

Updated

Jul 24, 2024

CFD trading in the UK has boomed in recent years with the increase of online retail trading. In fact, the UK is credited with the invention of the CFD – they were first traded on the London Stock Exchange back in the 1990s. In this article, we detail all you need to know about CFD trading in the UK, including the pros and cons and how to get started.

See all CFD Brokers in the UK

How CFD Trading In The UK Works

A contract for difference (CFD) is a type of derivative that allows traders to speculate on the price movements of an underlying asset, such as the FTSE. In simple terms, a CFD is a contract for the difference in value between the buy and sell price.

So, if a trader believes the price of gold will fall, they will purchase a short position CFD. When gold’s value falls as predicted, the trader will close their CFD position and they’ll receive the price differential in profit. Unlike most derivatives, CFDs have no expiry date, meaning traders can choose when to close their position at any time.

CFDs are a derivative because the underlying asset is never owned by the trader. The value of the instrument is derived from the asset that it is based on. CFD trading in the UK is available on almost any tradeable asset. This includes forex pairs with the GBP, commodities, indices, British stocks and shares plus cryptocurrencies.

Pros Of CFD Trading In The UK

• Hedging – CFDs are a great instrument for those wishing to trade in all markets because they can be used to hedge. This is a trading strategy that lets you cover your risk of a trade by opening a position in another market, often with an opposing sentiment, covering yourself if the market swings against you.
• Shorting: Spot trading (i.e purchasing an asset) is only valuable if the trader believes the price will increase – your classic ‘buy low, sell high’ scenario. However, CFDs allow traders to short an asset and profit from a decrease in price.
• Leverage – CFD trading in the UK can be leveraged, meaning traders have the opportunity to open positions larger than the spot market would allow. Funds are borrowed from the brokerage firm and the results of a trade are multiplied. This can lead to increased profits if the trade is successful. Note that the British financial regulator, the FCA, imposes limits on retail leverage rates.
• No delivery of assets – Sometimes purchasing a spot asset can be burdensome. For example, commodities such as wheat, corn or gold, will need to be stored or delivered to you. These can be purchased as ‘unallocated’, meaning you hold a share of an asset that is owned by an organisation, but this has the same financial impact as a CFD as the value comes when you sell the asset and pocket the difference in price.

Risks Of CFD Trading In The UK

• High-risk activity – CFDs are a risky instrument to trade, particularly when using leverage. CFD trading in the UK is regulated by the FCA, which requires licensed platforms to display a risk warning on their website. It’s vital that traders understand the possibility of losses before investing.
• Taxes – CFD trading in the UK has the same economic impact as spread betting. However, since spread betting is classed as gambling, there are no requirements to pay tax on earnings in the UK. CFDs are a financial instrument sold for the purposes of creating profit and are therefore subject to capital gains.
• Restrictions on certain assets – All derivatives on cryptocurrencies are banned in the UK. The FCA has imposed this restriction to protect retail traders because of the volatility of the underlying asset. UK traders may be disappointed, but spot crypto is fortunately still available.

How To Start CFD Trading In The UK

To start CFD trading in the UK, you’ll need to complete the following steps:

Select A Brokerage Firm

Select the best CFD brokerage that has all the functionality that matters to you. While low spreads and commission are important, it’s also vital they provide the underlying asset you wish you trade, the level of leverage you’re after, and a platform that suits you.

Open An Account

Before you begin CFD trading in the UK, it’s worth opening a demo account. These practice accounts allow you to trial the platform and test your strategies before risking any capital. Once you’re comfortable, progress to a real account.

Select An Asset

Each asset comes with its own set of pros and cons. For example, CFDs on UK stocks and shares are usually subject to commission (generally around £7-9 per trade), while most other assets are charged via spreads. The volatility of an asset is another key factor. The Cable (USD/GBP) is a fairly stable pair that is suitable for beginners. For those looking for more dramatic price movements, the GBP/JPY may be a better option.

Implement Risk Strategies

Since CFDs are typically leveraged, it is important that traders implement risk strategies to limit losses where possible. Regulated platforms offering CFD trading in the UK will provide negative balance protection as standard, meaning traders cannot lose more than their deposit amount. However, risk management shouldn’t stop here. Traders should implement appropriate stop loss and take profit orders, hedge where necessary and select appropriate leverage.

Monitor Positions

Keeping an eye on the market at key times is a tactic that most successful traders follow. Consider which platforms will make this easiest for you. Many of the top firms offering CFD trading in the UK will provide a mobile app for on-the-go trading. Alternatively, if you prefer desktop only, enable Bloomberg news and price change push notifications to help you keep your finger on the pulse.

Realise Profits

Knowing when to close a position is perhaps the most important factor. If your strategy is short-term and high frequency, such as day trading or scalping, you’ll want to frequently close trades. Those with long term approaches may want to hold positions overnight. Use profit calculators to ensure overnight fees and spreads are taken into account.

Regulations On CFD Trading In The UK

CFD trading in the UK is regulated by the Financial Conduct Authority (FCA). The FCA imposes certain obligations on companies designed to protect retail traders. In particular, there are limits on the leverage permitted, varying by asset and volatility. The maximum is 1:30, available on the most stable forex pairs. Stocks and shares will usually be around 1:5, but this can vary.

Regulations also mean that brokerages must provide negative balance protection on CFD accounts. When trading on leverage, the results of a trade are multiplied. This can mean that losses exceed the deposit amount. Negative balance protection means that traders are issued with a margin call if an asset’s price moves dramatically. A trader must prove they can afford the position by depositing more funds. Until this is complete, the account will only be able to close existing positions, not open new ones.

Other regulations on CFD trading in the UK include a ban on cryptocurrency derivatives, the prohibition of bonuses and financial incentives when opening accounts, and the obligation to display a risk warning.

CFD Trading Taxes In UK

CFD trading in the UK has tax implications to be aware of. Unlike taxes paid through employment, which are taken through PAYE, traders themselves must report profits to HMRC. CFD profits are usually subject to capital gains, as opposed to income tax, because they involve the sale of an asset.

If you’re a higher rate tax-payer, you’ll pay 20% tax. If you do not have another income, this may be lower because of your personal allowance or any other tax relief you’re entitled to.

If you’re unsure about how to manage your taxes, consult a professional advisor.

Tips For CFD Trading In The UK

Our list of tips will give you a head start when CFD trading in the UK:

• Research a strategy – While picking your favourite British brands to invest in might seem like a good idea, in reality, there’s much more to stock picking than this. Research which strategy suits your portfolio management style and stick to it. As you practice, you’ll improve. For example, if you’ve got the time to manage fast change positions, forex scalping could be for you. Alternatively, maybe your skills lie in researching company fundamentals, in which case, long-term stock holding might be best. Consider where you can utilise your skill base.
• Keep a journal – A trading journal will be your bible for looking back and identifying mistakes. Note down your entry and exit points, position size, price, etc. A justification for your trade is also vital – why did you place that position? This will help you learn to rationalise and leave emotions at the door when CFD trading in the UK.
• Stop losses and take profit orders – Letting your losses run is often cited as the most serious mistake a trader can make. Stop loss and take profit orders allow you to set your limits before emotions can run wild. They’ll ensure a trade is closed automatically when an asset reaches a certain price and serve as a risk management tool that will be your new best friend.
• Education – Learn something new every day when CFD trading in the UK – this mantra will set you in good stead for a career in investing – and it doesn’t have to be the hard way. There are hundreds of blogs, forums and trading courses where experienced investors will let you in on their wealth of knowledge. Make it your goal to never stop learning and growing.

Final Word On CFD Trading In The UK

CFD trading in the UK presents a fantastic opportunity to profit in bearish markets. They enable traders to hedge existing spot trades and utilise leverage to maximise gains. In this article, we’ve covered how CFDs work, plus their pros and cons. Now, check out our list of the top CFD brokerages in the UK to get started.

FAQs

Is CFD Trading In The UK Legal?

Yes, CFD trading in the UK is legal, even dramatically increasing in popularity in recent years. CFDs are available on most assets, including forex, commodities, indices and stocks and shares. However, they’re not available on cryptocurrencies as all derivatives of digital tokens are banned by the FCA.

Is CFD Trading Tax Free In The UK?

No, profits on CFDs are typically subject to capital gains tax in the UK. Closing a CFD position is the equivalent of selling an asset under UK tax law. This is different to spread betting, which is not taxed as it is considered gambling.

How Does CFD Trading In The UK Work?

CFD trading in the UK is when investors and brokerage firms make a contract to exchange the difference in the value of an asset between the buy and sell price. Traders can choose to open leveraged positions, which will multiply the results of a trade. No underlying asset is exchanged.

Are CFDs Regulated In The UK?

Yes, since CFDs are considered financial products, any firm offering contracts for difference is required to be regulated by the UK’s Financial Conduct Authority (FCA).

Is CFD Trading In The UK Profitable?

CFD trading in the UK is high risk and many retail traders lose money. Having said this, successful traders can turn a profit. Beginners should open a demo account to practice before using real funds and implement careful risk management strategies.

Recommended Reading