Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. 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.
CFDs or Contracts for difference is simply an agreement to exchange the difference in value of a financial instrument between the time at which the contract is opened and the time at which it is closed.
CFDs explained & how to trade CFDs
Call 020 7638 6996 or email newaccounts@guardianstockbrokers.com to discuss opening a trading account.
1. What are CFDs ?
A CFD is simply an agreement to exchange the difference in value of a particular share (or other financial instrument) between the time at which the contract is opened and the time at which it is closed.
In the case of share CFDs, unlike a traditional share, when you open a position you are not required to pay for the full value of the trade but rather you are required to deposit collateral. This is known as the Initial Margin, which can be as low as 5% of the purchase price.
In recent years there has been a dramatic increase in the use of CFDs, they have in a short space of time become the instrument of choice for short term stock market investors.
2. How do CFDs work ?
CFDs, or Contracts for Difference, operate by exchanging the difference in value of a specific share or financial instrument from the time the contract is opened to when it is closed. Unlike traditional shares, CFD trading allows you to participate in the market without owning the underlying asset. When opening a CFD position, you only need to deposit collateral, known as the Initial Margin, which is typically a fraction of the trade's total value.
The appeal of CFDs lies in their leverage and flexibility. Leverage enables you to control larger positions with a smaller initial investment, magnifying potential profits. For example, with an Initial Margin requirement of just 5% of the purchase price, you can gain exposure to a larger market value. This leverage can lead to increased returns, but it's important to note that it can also amplify losses.
In recent years, CFDs have experienced a significant surge in popularity among short-term stock market investors. Their ability to provide access to diverse financial markets, including shares, commodities, currencies, indices, and cryptocurrencies, has attracted traders seeking to capitalise on price movements in various assets. CFDs also offer the flexibility to take both long and short positions, enabling traders to profit from both rising and falling markets.
It's important to understand the risks associated with CFD trading, such as market volatility and the potential for losses exceeding your initial investment. Therefore, it's crucial to have a solid understanding of CFD mechanics, employ risk management strategies, and stay informed about market conditions.
With their accessibility and potential for high returns, CFDs have become a favored instrument for short-term trading. However, it's essential to approach CFD trading with a disciplined mindset, proper knowledge, and a well-defined trading plan to navigate the markets effectively and achieve your financial goals.
3. How to Trade CFDs:
Six Stage Guide to Getting Started
The six stages to trade CFDS
Stage 1: Selecting Guardian Stockbrokers as Your CFD Broker
When it comes to trading CFDs, choosing Guardian Stockbrokers as your trusted broker is an excellent decision. With our strong reputation in the industry, we offer a reliable and secure trading environment. Our user-friendly trading platform provides easy access to a wide range of CFD markets, including stocks, indices, commodities, and forex. We pride ourselves on competitive spreads and transparent pricing, ensuring you get the best possible trading conditions.
Stage 2: Opening an Account with Guardian Stockbrokers
To start your CFD trading journey with Guardian Stockbrokers, you'll need to open a trading account. Our account opening process is straightforward and streamlined, allowing you to get started quickly. Simply provide your personal details, complete the registration form, and agree to our terms and conditions. Our efficient account verification process ensures your account is approved promptly, so you can begin trading without delay.
Stage 3: Market Analysis and Strategy Development
Before placing trades, it's crucial to conduct thorough market analysis. Utilise technical analysis tools, such as charts and indicators, to identify patterns and trends. Additionally, consider fundamental analysis by keeping track of economic news and events that may impact the prices of the underlying assets. Develop a trading strategy based on your analysis, including entry and exit points, risk management techniques, and position sizing.
Stage 4: Placing Trades
With a funded trading account and a solid strategy in place, you can begin placing trades. Choose the desired asset you want to trade and decide whether to take a long or short position based on your analysis. Specify the size of your position and set appropriate stop-loss and take-profit levels to manage risk. Double-check all the details before confirming the trade.
Stage 5: Monitoring and Managing Positions
Once your trade is executed, closely monitor the market to stay updated on price movements. Regularly review your trades and consider adjusting stop-loss and take-profit levels as the market evolves. Stay informed about market news and events that could impact your positions. Implement risk management techniques, such as trailing stops, to protect your profits and limit potential losses.
Stage 6: Continuous Learning and Improvement
Trading is an ongoing learning process. Stay dedicated to enhancing your knowledge and skills in CFD trading. Stay updated with market trends, learn from your experiences, and adapt your strategy as needed. Attend webinars, read educational materials, and seek out trading communities to gain valuable insights and exchange ideas.
By following these stages and continuously refining your approach, you can navigate the world of CFD trading with confidence and increase your chances of success.
4. Risks and Considerations in CFD Trading
While CFD trading can be a lucrative endeavour, a large percentage of clients lose money, it is crucial to be aware of the risks and considerations involved. This section provides an in-depth exploration of the potential challenges you may encounter as a CFD trader. Understanding these risks is essential for making informed decisions and managing your trading activities effectively.
Risk Management Strategies
Effective risk management is vital in CFD trading to protect your capital and minimise potential losses. This section explores various risk management strategies that you can employ to safeguard your trading portfolio. Strategies include setting stop-loss orders, implementing limit levels, using trailing stops, diversifying your positions, and managing leverage effectively. By understanding and implementing risk management techniques such as these, you can maintain better control over your trading outcomes.
Market Liquidity and Execution Risks
Market liquidity and execution risks are important considerations when engaging in CFD trading. Market liquidity refers to the ability to buy or sell an asset at a desired price with minimal impact on its market value. In CFD trading, liquidity risk arises from the potential difficulty of executing trades at the desired price due to low trading volumes or high volatility.
Low liquidity can result in wider bid-ask spreads, making it more challenging to enter and exit positions at favorable prices. This can lead to slippage, where the executed trade price differs from the expected price, potentially resulting in higher costs or reduced profits. By being aware of market liquidity dynamics, staying informed about current market conditions, and utilising effective risk management techniques, traders can navigate the potential challenges associated with market liquidity and execution risks in CFD trading and optimise their trading outcomes.
Psychological Factors and Emotional Discipline
Achieving success in CFD trading extends beyond technical analysis and market knowledge; it also requires developing emotional discipline and a resilient mindset. Explore the psychological factors that commonly influence trading decisions and gain insights into navigating them effectively. Learn practical tips and techniques to help cultivate emotional discipline and maintain a resilient mindset throughout your trading journey. Emphasise the significance of managing emotions such as fear, greed, impatience, and overconfidence, which can cloud judgment and lead to poor decision-making.
By acknowledging and addressing these psychological challenges, you can make more objective and well-informed trading decisions. Implement strategies to manage fear and anxiety, avoid impulsive trading based on greed, and remain patient during market fluctuations. Highlight the importance of maintaining a rational approach to trading, independent of individual trade outcomes. Adopt these practices to stay focused on your trading strategy, adapt to changing market conditions, and avoid common pitfalls that may result in unnecessary losses.
Regulatory and Tax Considerations
Understanding and complying with regulatory requirements and being aware of the tax implications are crucial aspects of CFD trading. Each jurisdiction has its own regulations governing CFD trading, so it's important to familiarise yourself with the specific rules in your country.
Additionally, CFD trading can have tax implications, such as capital gains tax and reporting requirements. Having a clear understanding of the tax obligations associated with CFD trading is essential to avoid legal issues and ensure compliance with tax laws. While detailed tax information is not provided in this section, it highlights the importance of being aware of the potential tax implications and seeking professional advice when needed.
By considering the risks and considerations involved in CFD trading, implementing effective risk management strategies, understanding market liquidity risks, cultivating emotional discipline, and complying with regulatory and tax requirements, you can approach CFD trading confidently and increase your chances of long-term success. Continuous education, learning, and staying informed about market trends are key factors in becoming a skilled and knowledgeable CFD trader. By adopting a comprehensive approach that combines regulatory compliance, tax awareness, risk management, and continuous improvement, you can navigate the world of CFD trading more effectively and optimise your trading outcomes.
5. Five Essential CFD Trading Strategies
To excel in CFD trading, it is crucial to employ effective trading strategies that can help you navigate the ever-changing financial markets. This section explores five essential CFD trading strategies that can enhance your trading performance and increase your chances of success.
1. Trend Following:
This strategy involves identifying and capitalising on market trends. By analysing price charts and technical indicators, traders aim to enter positions in line with the prevailing trend. Whether it is an uptrend or a downtrend, trend following strategies seek to ride the momentum and in an attempt to maximise profits.
2. Breakout Trading:
Breakout trading focuses on identifying key levels of support or resistance and taking trades when the price breaks out of these levels. Traders look for significant price movements that often occur after a period of consolidation. Breakout strategies aim to capture these breakout movements and generate profits.
3. Range Trading:
Range trading is suitable for markets that lack clear trends. Traders identify price ranges and aim to profit from price oscillations within these boundaries. By buying near support levels and selling near resistance levels, range trading strategies capitalise on predictable price behavior within the defined range.
4. Mean Reversion:
Mean reversion strategies revolve around the concept that prices tend to revert to their average or mean value after deviating from it. Traders identify overbought or oversold conditions and anticipate price reversals. Mean reversion strategies involve taking positions contrary to the recent price movement, with the expectation that prices will revert back to their average.
5. Risk Management:
Effective risk management is a critical component of successful CFD trading. This strategy involves implementing techniques such as setting stop-loss orders, diversifying your portfolio, and managing position sizes. Risk management strategies aim to protect against potential losses and limit overall risk exposure.
It is important to note that these strategies are not foolproof and require careful analysis, practice, and adaptation to market conditions. Traders should also consider their individual trading style, risk tolerance, and goals when selecting and implementing these strategies.
By incorporating these five essential CFD trading strategies into your trading approach, you can enhance your decision-making process, with a view to improve your trade entries and exits. Remember to continuously learn, stay updated with market trends, and practice in a risk-controlled environment to refine and optimise your trading strategies.
6. Analysis Tools for CFD Trading
Technical Analysis Tools for CFD Trading
Technical analysis is a widely used approach in CFD trading that involves studying historical price and volume data to identify patterns, trends, and potential future price movements. Traders employ various technical analysis tools to gain insights into market behavior and make informed trading decisions.
Charting tools:
Charting platforms provide a range of tools, such as line charts, bar charts, and candlestick charts, to visualise price data. These tools help traders identify patterns, support and resistance levels, and trend lines, enabling them to spot potential entry and exit points.
Indicators:
Technical indicators are mathematical calculations applied to price and volume data. They provide additional information about market conditions, momentum, and potential reversals. Common indicators include moving averages, oscillators, and trend-following indicators. Traders often combine multiple indicators to confirm signals and generate trading ideas.
Pattern recognition:
Traders use pattern recognition tools to identify recurring chart patterns, such as head and shoulders, triangles, and double tops/bottoms. These patterns can provide insights into potential price movements and assist in making trading decisions.
Fibonacci retracements:
Fibonacci retracements are based on a mathematical sequence that identifies potential support and resistance levels. Traders use these levels to determine potential price retracements or extensions within a trend, aiding in trade entry and exit decisions.
Fundamental Analysis for CFD Trading
While technical analysis focuses on price and volume data, fundamental analysis examines the underlying factors that influence market prices. Fundamental analysis involves studying economic indicators, company financials, news events, and other qualitative and quantitative factors to assess the intrinsic value of an asset.
Economic indicators:
Traders monitor key economic indicators, such as GDP growth, interest rates, inflation, and employment data, to gauge the overall health of an economy and identify potential market trends. Positive or negative economic news can significantly impact market sentiment and asset prices.
Company analysis:
Fundamental traders analyse company financial statements, earnings reports, and industry trends to assess the financial health and growth prospects of specific companies. They look for factors such as revenue growth, profitability, debt levels, and market share to make informed investment decisions.
News and events: Major news events, such as central bank announcements, geopolitical developments, and corporate earnings releases, can have a profound impact on CFD markets. Fundamental traders stay informed about relevant news and events that could influence asset prices and adjust their trading strategies accordingly.
By combining technical analysis tools and fundamental analysis insights, CFD traders can gain a comprehensive understanding of market dynamics and make well-informed trading decisions. It is important to note that technical and fundamental analysis approaches are not mutually exclusive but rather complementary, providing a holistic view of the market. Traders should utilise both approaches based on their trading style and objectives to maximise their trading potential.
7. Understanding Key Features of CFD Trading
Traded on Margin
When trading on margin, you only need to pay a percentage of the total value of a transaction upfront, which is known as the 'Initial Margin.' This allows you to access a larger amount of position than you would be able to if you were buying or selling the position outright. However, the margin on all open positions must be maintained at the required level to keep the position open. If the value of the position moves against you and reduces your cash balance so that it falls below the required margin level, you will receive a 'Margin Call' and will have to pay additional money into your account to keep the position open or risk having to close the position. Essentially, trading on margin allows you to magnify your gains, but it also increases your risk of losses.
Trade in Rising or Falling Markets
CFDs enable you to trade in both rising and falling markets, by offering the option to go 'Long' or 'Short'. A 'Long' trade is when you 'Buy' an asset with the expectation that its value will rise, much like when you purchase a regular share. On the other hand, a 'Short' trade is when you 'Sell' an asset that you do not own, anticipating that the price will fall, and you can purchase the asset back at a lower price. This is essentially a bet on the asset's value decreasing. This ability to trade in both directions allows you to potentially profit in any market condition, regardless of whether it is bullish or bearish.
No Stamp Duty
There is no stamp duty on CFDs as you do not actually Buy the underlying share*.
*Tax laws may change
Commission
Commission is charged on CFDs just like on an ordinary share trade. The commission is calculated on the total position value not the margin paid.
Overnight Financing
Because CFDs are traded on margin, if you hold a position open overnight it will be subject to a finance charge. Long CFD positions are charged interest, Short CFD positions will be paid interest. The rate of interest charged is set at 2.50%** above or below the current LIBOR (London Inter Bank Offered Rate). The interest on each position is calculated daily by applying the applicable interest rate to the daily closing value of the position. The daily closing value is the number of shares multiplied by the closing price. Each day’s interest calculation will be different unless there is no change in the share price.
** Subject to change
Shares and Indices
CFDs allow you to take a view on shares and indices as well as some sector specific indices (such as Mining).
Risk Management Facilities
We place strong emphasis on risk management techniques. Robust risk management to protect profit and limit downside risk
is as important as placing the trade. Because of the higher risk nature of trading on margin, we can offer comprehensive ‘Stop Loss Order’ and ‘Limit Order’ facilities so that investors can manage risk in fast moving markets.
Limit and stop loss orders
Because of the geared nature of trading on margin it is essential to have access to facilities that let you open or close positions if certain levels are reached.
Limit Order
A Limit Order is one that is executed at a better price than the prevailing market price, i.e. for a Long CFD trade when the stock drops to a certain level or for a Short CFD trade when the stock rises to a certain level.
Example
BT Group is trading at 180–180.5You want to Buy 10,000 BT Group as a CFD with a Limit of 175p, therefore you do not wish the Order to be opened unless BT Group reaches 175p. This Order is held by the CFD Provider until the Limit level is reached. The next day BT Group is 174.5–175 and an opening trade of 10,000 BT Group is executed at the Limit level of 175p.
Stop Loss Order
A Stop Loss Order is one that is executed at a worse price than the prevailing market price. A Stop Loss Order is a price level set by the client on a particular trade, that if reached, automatically closes out the particular position at the desired price. It is possible to make substantial profits when trading CFDs as well as substantial losses which is why we may recommend you consider placing a Stop Loss Order when you trade.
Example
BP is trading at 467–468
You believe that BP will rise and you Buy 2,000 BP at 468p as a CFD. You want to limit your potential losses as the markets are currently very volatile. You place a Stop Loss Order which will close out your position at 450p. The following day BP drops steadily to 420–421 and you are not able to watch the market. Your position is closed at 450p limiting your loss to £360, had you not placed a Stop Loss your losses would be running at £960.
8. CFD Trading vs. Traditional Investing
CFD trading offers a unique alternative to traditional investing methods, bringing several distinct advantages and considerations. One key difference is the ability to speculate on both rising and falling markets. Unlike traditional investing, where you typically profit from a rising market, CFDs allow you to take advantage of both upward and downward price movements. This flexibility opens up a broader range of trading opportunities and potential profits.
Another difference is the leverage and margin aspect of CFD trading. With CFDs, you can trade on margin, meaning you only need to deposit a fraction of the total trade value. This allows for greater exposure to the market with a smaller initial investment. However, it's important to note that while leverage can amplify profits, it also increases the risk of losses. Proper risk management and understanding of leverage are essential in CFD trading.
CFD trading also provides access to a wide range of markets, including stocks, indices, commodities, and currencies. This diversity allows traders to create a diversified portfolio and explore different sectors and asset classes. In contrast, traditional investing often involves more limited options, such as individual stocks or mutual funds.
Additionally, CFD trading offers the advantage of short-selling, enabling traders to profit from falling markets. This can be particularly beneficial during market downturns or when identifying potential market reversals. Traditional investing typically requires owning the underlying asset, making it challenging to profit from declining prices.
However, it's important to recognise that CFD trading also carries its own set of risks. The use of leverage and the short-term nature of CFD trades can lead to higher volatility and potential losses. Furthermore, CFDs are derivative products, meaning they derive their value from an underlying asset. As a result, they may not provide the same long-term ownership benefits as traditional investing.
Ultimately, the choice between CFD trading and traditional investing depends on individual preferences, risk tolerance, and investment goals. Some investors may prefer the long-term stability and ownership aspects of traditional investing, while others may find the flexibility and short-term trading opportunities of CFDs more appealing. It's crucial to carefully consider your financial objectives, conduct thorough research, and seek professional advice if needed to make an informed decision that aligns with your investment strategy.
Real-Life Examples of CFD Trading
Example of a Share CFD Long Trade
A Long trade is when you Buy a share CFD
Marks and Spencer is trading at 240–240.25p
You believe that Marks and Spencer’s share price is going to rise and place a trade to Buy 5000 shares as a CFD at 240.25p.
The value of the contract would be £12,012.50, but you would only be required to make an initial deposit of 7.5% (Initial Margin of £900.94.
The commission on the trade is £12.01 (£12,012.50 x 0.1%) unlike a traditional share there is no stamp duty payable.
10 days later Marks and Spencer is trading at 270–270.25p
You decide to close your position and take a profit by selling 5000 Marks and Spencer at 270p which equates to £13,500.
The commission on the trade is £13 .50 (£13,500 x 0.1%).
Profit on trade is calculated as follows:
Of course if the market had moved against you, you would have made a loss.
Example of a Share CFD Short Trade
Share CFD example Short Trade
A Short trade is when you Sell a share CFD
Marks and Spencer is trading at 300–300.25p
You believe that Marks and Spencer’s share price is going to fall and place a trade to sell 5000 shares as a CFD at 300p. The value of the contract would be £15,000, but you would only be required to make an initial deposit of 7.5% (Initial Margin) of
£1,125.
The commission on the trade is £15 (£15,000 x 0.1%).
10 days later Marks and Spencer is trading at 280–280.25p
You decide to close your position and take a profit by buying 5000 Marks and Spencer at 280.25p. The commission on the trade is £14.01 (£14,012.50 x 0.1%).
Profit on trade is calculated as follows:
Of course if the market had moved against you, you would have made a loss.
In this example by being Short M&S, interest payments are credited to your account.
Example of a Indices CFD Long Trade
FTSE 100 at £10 a point
The FTSE 100 is currently trading at 7792 and the quote is 7791–7793 on the FTSE CFD.
You believe that the FTSE is going to rise and Buy 1 Maxi Index CFD at a total value of £77,930.
To open your position you supply a deposit of £3896 per Maxi Contract. Later that day FTSE has risen to 7991 and the daily FTSE spread is now 7990–7992.
You decide to close your position and take a profit by selling 1 Maxi Index CFD which equates to £79,900.
The profit on the trade is calculated as follows:
To calculate the overall profit you must take into account the financing charges on the deal.
Of course if the market had moved against you, you would have made a loss.
Example of a Indices CFD Short Trade
FTSE 100 at £10 a point
The FTSE 100 is currently trading at 7400 and the quote is 7399–7401 on the FTSE CFD.
You believe that the FTSE is going to fall and sell 1 Maxi Index CFD at a total value of £73,990.
To open your position you supply a deposit of £3699 per Maxi Contract. Later that day FTSE has fallen to 7299, spread is now 7298–7300.
You decide to close your position and take a profit by buying 1 Maxi Index CFD which equates to £73,000.
The profit on the trade is calculated as follows:
To calculate the overall profit you must take into account the financing charges on the deal.
Of course if the market had moved against you, you would have made a loss.
Benefits of CFD trading
Long and short positions
CFDs allow you to take advantage of rising and falling markets
No stamp duty to pay
Unlike most UK shares there is no stamp duty to pay.
Small initial deposit
Only pay a small percentage of the trade value.
Speculate on price movements
Spread betting and CFD products allow you to take a position on a market price without owning the underlying asset.
Competitive spreads
Helps keep your costs of trading down.
Negative balance protection (2)
You can never lose more than is in your account.
A range of over 17,000 markets
Tradable with a Spread bet and CFDs allowing you to benefit from both rising and falling prices
Award-winning
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I could not more highly recommend Guardian Stockbrokers, everyone has been brilliant. The attentiveness, training and technical detail provided, has enabled a fast track learning and an ability to manage the portfolio in a way that would far exceed my own capabilities. It is almost as though they own the positions themselves; via their due-diligence and proactive manner of continuous monitoring. Above and Beyond.
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Our platform provider IG is the UK's No 1 provider by number of primary relationships with FX traders (Investment Trends UK Leveraged Trading Report released July 2019).
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Negative balance protection applies to trade related debt only and is not available to professional traders.