CFDs (Contracts for Difference) are a flexible and well-known way of trading.
They allow you to trade markets by speculating if the price will go up or down, similar to spread betting in many ways.
CFDs were considered illegal in the UK for many years, but they have since been given legal status by HM Revenue and Customs in 2007.
The Financial Services Authority, who oversaw this opinion change, stated that: “by allowing people to speculate on share prices with their money rather than investing any cash into the underlying share CFDs would reduce the risks associated with investments in shares.”
One reason for this change in opinion was that many investors wanted an alternative to spreading betting and other illegal trading forms, such as rolling spot forex.
Why were CFDs illegal?
The reason CFDs were thought to be illegal was because they are a leveraged product.
Effectively you can buy or sell shares worth many multiples higher than the cash in your account, so if you had £2,000 in your trading account, you could buy or sell shares valued at £100,000 without having to put up any additional money.
This leveraging ability has been suggested as being potentially dangerous, and it’s why CFDs have become a popular platform for day-traders looking to gain a quick profit from price fluctuations over short periods.
However, the opinion change has allowed UK-based CFD traders to use trading platforms such as IG Index and Plus500, which have been very popular in this country.
Many people in the City and the online trading community said they welcomed this opinion change because it allowed them continued access to CFDs that had become a big part of their lives.
However, some also expressed concern that there was still an element of doubt about whether or not CFDs were utterly legal, pointing out that case law around these kinds of transactions is uncommon.
It is yet to be resolved by HMRC.
How can I avoid scam broker CFDs?
Some signs may help you identify a fraudulent broker.
The first one is using demo accounts to attract customers with free bonuses but not to withdraw their profits.
It means that traders will need to engage in risky trades even with limited funds (or within Demo Mode), which will most likely lose their real money.
It is sometimes made worse by brokers requiring customers to deposit significant amounts to withdraw later.
Another sign of potential scams is very high commissions and spreads.
Trustworthy companies provide tools for beginner traders who need time to master the market (e.g., time-limited demo accounts, accessible analysis and educational material).
They don’t need to make money from their clients’ losses since beginner traders have a very high loss percentage.
Why are UK CFD companies regulated?
Financial authorities within the European Union have decided that all companies trading financial derivatives must be licensed by a financial authority in this region or belong to a group with one as its parent company.
It means that if you want to provide any derivative services for European citizens, you’ll need to ask your country’s primary regulator whether you can do so or not.
If the answer is no, perhaps opening an office in Europe is a better solution.
Which places should you consider?
There are brokers to choose from when opening an account for trading CFDs.
Before signing up at a broker’s website, you still need to check if your country is regulated by any financial authority concerning this type of trading account.
ESMA regulation directly affects CFD services provided in the UK.
Are there any other options for UK citizens? Yes, there are reputable companies regulated by certain financial authorities in the European Union (e.g., FCA in the United Kingdom).
However, these accounts don’t offer many benefits for commission fees or bonuses, unlike what you can get with Pattern Day Trading Accounts.
UK residents shouldn’t open an account at any broker that doesn’t regulate their business by a financial authority within the European Union if they want to avoid unnecessary problems.
Link to Saxo for more info.