How to trade CFDs: a beginners guide

Trading CFDs is one the most popular methods of stock market trading. Learn how to do it in this beginners guide.

Trading CFDs 

What are CFDs? 

CFD stands for Contracts for Difference. 

A CFD is an agreement between two parties to exchange the difference in the value of a financial market between the time the contract (trade) is opened and the time it is closed. 

You can trade CFDs on markets like shares, foreign currency (Forex), indices, bonds, ETFS, and commodities. 

CFDs are what’s called Derivatives. That means the price you trade comes from the underlying market value.  

For example, if you were to trade US crude oil CFDs on Markets.com, the price would come from the underlying value of the US crude oil futures contract (WTI).  

You don’t own the underlying asset when trading CFDs. You buy or sell contracts by speculating on how you think the market will move. 

By trading CFDs you are taking a Position. A Position is your exposure to the market, i.e., the value of the CFDs you wish to trade.  

Benefits of trading CFDs 

CFDs are a great way to get started in the world of trading. They have lots of benefits that make them a smart choice for first-time traders. 

Efficient use of your capital 

Capital is the money you put down to start trading. With CFDs, you can use that more efficiently. 

You trade using your margin. This gives you leverageWe will go into more detail on these two aspects of CFD trading later. 

For now, it means you only have to put down a fraction of the trade’s full value to open a position. That lets you start trading with a small budget. 

Flexibility 

Because you are trading agreements to exchange differences in the opening and closing points of a position, CFDs offer flexibility in how you can trade. 

CFDs let you trade Long or Short. 

In CFD trading, you trade long is if you believe prices will go up 

If you think prices will rise, you buy your contracts and take a Long Position. 

You trade short if you believe prices will go down.  

If you think prices will drop, you sell your contracts and take a Short Position. 

This means you can trade on markets that are going down as well as up and still potentially make a profit. This offers traders quite a lot of flexibility. 

No Stamp Duty 

In the UK, you do notpay stamp duty on a CFD trade. This is because you do not take ownership of any of the assets you are buying and selling.  

Please be aware that tax treatment of CFD trading will depend on your individual circumstances and be subject to change. 

Variety 

As CFDs can be traded across lots of different markets, you have plenty of scope to choose sectors, companies, and geographies that you think will help you reach your trading goals. 

Markets available include: 

  • Shares – Shares in individual companies like Tesla, Apple, Amazon, Lloyds, Vodafone, Volkswagen etc 
  • Foreign currency (Forex) – US Dollars, Euros, Pounds, and so on 
  • Indices – Stock markets like FTSE 100, S&P 500, Dow Jones, DAX, etc. 
  • Commodities – Assets like oil & gas, crops, and so on 

Markets.com offers 2,200 different instruments for you to choose from on our multi-asset platform. 

Risks of trading CFDs 

There are inherent risks when it comes to trading any financial product like Contracts for Differences. 

Please read the below carefully and understand the potential risks you will undertake if you decide to start trading CFDs. 

CFDs are Leveraged Products 

Leveraged products like CFDs give you market exposure for a percentage of the full trade you wish to make. This means that you can potentially make profits if the market moves in your favour. 

You can also lose money if the market moves against you and you are not using adequate risk management tools. 

Let’s look at an example. 

If you place a CFD trade worth £1,000 with a margin rate of 5%, the margin requirement to open this trade would only be £50. 

However, if the price of the trade moves against you by 10%, you would lose £100, i.e., double your initial stake in your initial CFD trade. 

This is because your exposure to the market, i.e., your risk, is the same as if you had purchased £1,000 worth of physical shares, foreign currency, commodities and so on. 

This means that any move in the market will have a greater effect on your capital than if you had purchased the same value of shares.  

Market volatility & gapping 

Markets are inherently volatile. They can go up, but they can also go down. 

Outside effects like government policies, unexpected information and changes in market conditions mean prices can fluctuate.  

Small changes may have a big impact on returns when it comes to trading CFDs. 

Unfavourable effects on the underlying asset’s value may cause the trade provider to demand further margin payments. These are called Margin Calls 

If a margin call cannot be met, the provider may close your position. Alternatively, you may have to sell at a loss.  

Another risk associated with market volatility is Gapping. 

Gapping happens when prices of instruments, i.e., CFDs being traded, suddenly shift from one level to another skipping any intermediate levels.  

This may mean Stop-loss Orders are applied at an unfavourable price. A stop-loss order is a market risk tool that helps manage risk by closing a position once an instrument or asset reaches a certain price.  

Market volatility’s risk and impact can be lowered by applying boundary or guaranteed stop-loss orders to your trades.  

Client Money Risk 

There are client money protection laws that apply to CFDs in countries where contract trading is legal.  

They are designed to protect investors from potentially harmful practices from irreputable CFD providers. 

Money transferred to CFD providers must be kept separate from the provider’s money. This is to prevent CFD providers hedging their own investment. 

Even so, some laws may not prohibit clients’ money from being pooled into one or more accounts. 

A provider withdraws an initial margin when a contract is agreed upon. The provider also has the right to request further margins from pooled accounts. If clients in the pooled account cannot meet margin calls, the CFD provider has the right to draw from the pooled account. This can have a negative impact on returns. 

How to trade CFDs 

Here is how to get started trading Contracts for Difference. 

Margin & Leverage 

Before you get started, it’s vitally important you understand the concepts of Margin and Leverage. 

Margin is the money you need to lay down in order to open a leveraged trade, i.e., start trading CFDs. 

Margin and leverage are related terms.  

In short, the leverage ratio determines the amount of margin you need to have in your account. 

Margin rates vary across different regions and asset classes.  

Leverage allows you to gain full exposure to a market by investing only a fraction of the capital you would normally require.  

Upon opening a transaction, the margin value will be required and held as collateral to be maintained until termination of the relevant transaction.  

The amount of the margin payments is dependent on the leverage ratio of the CFD, the underlying financial instrument, and the contract value of the transaction. 

Let’s look at an example. 

If you are trading FX with a leverage ratio of 30:1 – equivalent to a margin rate of 3.33% – it means you can control a trade with a notional value of £3000 with only £100 of margin. 

The minimum level required for maintaining positions is 50%.   

In the above scenario, once opening the trade you would need to maintain at least £50 of available funds in your account to satisfy the margin requirements.  

Please note: if margin thresholds are not met, then your positions may be closed. 

Set your budget & fund your account on Markets.com 

Firstly, set yourself a trading budget. 

If you are a beginner trader, you might want to start low.  

£100 is the minimum amount of funds you need to start trading with Markets.com. This is just to open your account. You do not need to trade the £100. If you have the correct margin funds on an instrument or asset, you could trade £50. 

The other available currencies are: USD/EUR/DKK/NOK/SEK/PLN/CZK/AED

Got more experience and confidence? You may want to add more funds – but this is only advised if you have previously traded CFDs before. 

If you want to try your hand at trading without risking your money, then open a Demo account. No money will change hands and you can explore the Markets.com platform without any of the risk. 

Build your trading plan 

Think about what you want to achieve from trading. 

  • How much profit are you hoping to make?  
  • How much time can you realistically spend trading? 
  • How much can you safely spend? 
  • Are you comfortable assuming the risk? 
  • What does acceptable loss look like to you? 

If you can answer these questions, it will help you make more informed trading decisions that suit your individual goals. 

Research your opportunities 

With over 2,200 assets to choose from, you will find opportunities to suit you at Markets.com. 

In the platform, you can search across CFDs on various sectors, such as: 

  • Shares  
  • Foreign currency (Forex) 
  • Indices 
  • Commodities 

You can also use Markets.com unique XRay and Insights analysis to help you decide. 

XRay is our streaming service, featuring videos and content from market experts. It covers everything from leading stocks to currency movements, to current affairs information. 

Insights is much the same: market news delivered by professionals. 

These tools will aid you in choosing the correct CFDs for you. 

Open your first position 

When you have decided which market you want to trade, you are ready to start trading. 

The first thing to decide is whether you want to go long or short.  

In CFD trading, you trade Long is if you believe prices will go up.  

  • If you think prices will rise, you buy your contracts and take a Long Position. 

You trade Short if you believe prices will go down.  

  • If you think prices will drop, you sell your contracts and take a Short Position. 

Once you’ve taken your position, your profit or loss will move in line with the underlying market price.  

You’ll be able to monitor this on our platform using the various performance and analytical charts available. 

You can also do this manually by placing the same trade you originally placed but in the opposite direction. 

For example, if you opened your position by buying, you could close by selling the same number of contracts at the sell price – and vice versa. 

Your profit or loss is calculated by multiplying the amount the market moved by the size of your trade. 

Buy & Sell Prices 

Buy and Sell Prices are very important. 

When trading CFDs, you will be offered two prices based on the instrument you are trading’s underlying value. 

  • The Buy Price is what you bid to purchase an instrument 
  • The Sell Price is the seller’s offer 

Buy prices will always be higher than the instrument’s current underlying value. The price to sell will always be lower. 

The difference between the two prices is called the Spread 

Number of contracts 

A key aspect of CFD trading is selecting how many contracts you wish to trade.  

Each market has its own minimum number of contracts. 

For example, the FTSE 100 has a minimum contracts number of one. 

There is no maximum contracts number. The level you can buy will depend on how much capital you originally put down, your budget, and so on. 

Stops & limits 

Stops and Limits are put in place to minimize trading risk. 

Remember: CFDs are leveraged products. You only ever need to put down a small deposit to gain exposure to the full value of the trade.  

This means your capital goes further but also means that you could lose more than your initial outlay. 

To help restrict your potential losses, you might choose to add a stop. Stops automatically close your position when the market moves against you by a specified amount. 

Limits are the opposite to Stops.  

They close your position when the market moves a specified distance in your favour. Limits are a great way to secure profits in volatile markets. 

An example CFD trade 

Let’s put all the above into practice. 

You want to trade shares in Apple as CFDs. 

The Apple shares have an underlying market price of 314.6p. The sell price is 314.5p and the buy price is 314.7p. 

Apple is expected to make an earnings announcement soon. Market forecasts suggest Apple’s earnings release will be positive and the company is performing well.  

Because you think the price will go up, you buy 2,000 Apple share CFDs at the buy price of 314.7. This is equivalent to buying 2,000 Apple shares. 

As CFDs are leveraged products, you do not need to put up the full value of the shares you wish to trade. You only need to cover the margin. This is calculated by multiplying your exposure with the margin factor for the market you are trading. 

In this example, the margin factor is 20%. Your margin would be 20% of the total exposure of your trade: 

  • The total exposure is £6,294 (2,000 CFDs x 314.7p). 
  • 20% of £6,294 = £1258.80. 

If the CFD value rises 

Your prediction was correct! Apple’s earnings announcement shows the tech giant has had a very good quarter. Sales are up, and its share price has risen.  

You decide to close your position when it reaches 354.3p, with a buy price of 354.4p and a sell price of 354.2p. 

You reverse your trade to close a position, so you sell your 2000 CFDs at a price of 354.2p. 

Now you can calculate your profit. 

To do that, you multiply the difference between the closing price and the opening price of your position by its size: 

  • 354.2 – 314.7 = 39.5  
  • 39.5 x 2,000 (the number of your CFDs) = 790 
  • Your profit = £790 

Remember: You will also need to pay a commission fee, capital gains tax, and any potential overnight fees that have affected your trade. 

If the share price goes down 

Bad news. Apple’s earnings are worse than the market anticipated. Its share price has fallen, and you decide to cut your losses and sell your CFDs. 

The sell price is 288.7. That means your position has moved 26p against you.  

The process for calculating your loss is the same as profit: 

  • 288.7 – 314.7 = -26. 
  • -26 x 2,000 = 520
  • Your loss = £520 

Those are the basics of what CFDs are and how to trade them. 

Learn the stock market: understanding stocks

In this guide, we’ll help you understand stocks, what they are, and how they’re grouped, so you can enter the world of stock market trading and investing.  

Understanding stocks & how they work 

What are stocks? 

Understanding stocks is simple. When you buy stocks and shares, you are buying a small piece of a company. This is called equity ownership and another name for stocks or shares is equities.  

Buying them means you’re a shareholder and are now entitled to capital appreciation and dividends if the company pays them. Dividends are payments made to shareholders as a share in a company’s profits. However, not all companies pay them. 

Essentially, you hold onto stocks in the hope they will increase in value. This is investing. You would physically own the shares you have bought. 

Stock market trading, on the other hand, is trading on a stock’s price movements. This is done using financial products called derivatives, such as contracts for difference (CFDs) or spread betting. Here, you don’t own the underlying asset you are trading. Any profit made is generated from movements in share prices. 

Asset sectors 

Another key part of understanding stocks is understanding asset sectors. To properly learn the stock market, you will have to learn what sectors equities are usually grouped into. Different sectors tend to move in different cycles, falling in and out of favour with traders and investors, and changing performance levels, throughout the year. 

A lot of investors and traders diversify their portfolios by picking equities from across the sectors. This helps them mitigate their risk. We’ll take a look at portfolio diversification later on. 

For now, we’ll look at the main sectors stocks are grouped into. 

Consumer discretionaryStocks that offer non-essential services. Think luxury goods, or consumer goods outside core needs. Examples of consumer discretionary stocks include: 

  • Nike 
  • McDonald’s  
  • Disney 

Consumer staplesThese are stocks in companies that produce products that are considered essential. Think items like food, drinks, agricultural products, tobacco, and pharmaceutical products. Non-durable household goods and personal products, including grocery stores and supermarkets are also included in this asset category. 

Examples of consumer staple stocks include: 

  • Nestlé 
  • Tesco 
  • Proctor & Gamble

EnergyThese are stocks companies who produce energy. Oil & gas tends to dominate here, but this class also includes started to include renewable energy stocks, nuclear and coal power. 

Examples of energy stocks include: 

  • ExxonMobil 
  • Royal Dutch Shell 
  • Canadian Solar  

FinancialsFinancials are stocks that cover financial services for retail and commercial customers. This includes banks, insurance companies, savings plans, investment managers, mortgage companies, and real estate. 

  • ING 
  • HSBC 
  • Allianz 

HealthcareCompanies that deal with medical goods and services fall into the healthcare stocks sector.  This includes hospital management firms, medical equipment, and medical products. It also includes research, development, production, and marketing of medical equipment, pharmaceuticals, and new biotechnology. Examples of healthcare stocks include: 

  • Bayer 
  • GlaxoSmithKline 
  • AstraZeneca 

IndustrialsIndustrial stocks cover a lot of different sub-sectors. In this case, we’re looking at aerospace, industrial machinery, and military & defence equipment. It includes cement, metal fabrication, pre-fab houses, and waste management. Industrials also include airlines and transport & logistics. Examples of industrial stocks include: 

  • IAG 
  • EasyJet 
  • BMW 

MaterialsCompanies in this sector are involved in the production or extraction of materials, as well as chemical production. Paper, containers and packaging also fall under the materials umbrella. Examples of Materials stocks include: 

  • BASF 
  • Rio Tinto Group 
  • Anglo American  

TechnologyThis sector includes IT businesses and companies that research, develop, produce, and distribute communication equipment such as cell phones, towers, cable, etc. It includes computer hardware and software, home entertainment, office equipment, data management, processing systems, and consulting services. Examples of technology stocks include: 

  • Apple 
  • Microsoft 
  • Spotify 

UtilitiesThis sector distributes electricity, oil, gas, water, etc.  Example of utility stocks include: 

  • E.ON 
  • Engie SA 
  • SSE 

How are the different asset classes affected by different economic cycles? 

Different asset classes behave differently depending on how the economy is performing. A good example of this is the difference between how consumer staples and consumer non-discretionary stocks behave.  

In tough economic times, the share price of non-discretionary stocks will likely go down. That’s because consumers won’t necessarily have the spare cash to spend on luxuries. Conversely, the share price of staples might go up because their services or products are considered essential. 

Utilities are also considered essential, so the share prices, in theory, should remain relatively stable. Until very recently, oil & gas stocks used to be very strong too. However, they are susceptible to volatility caused by market conditions. Oil prices crashed during the Covid-19 pandemic, and thus oil companies have seen their share prices fall in line with that. On the other hand, with governments investing heavily in renewable energy, green energy stocks are rising. 

Essentially, the principle of supply and demand is at play here. More on that later. 

Understanding stocks: Portfolio diversification 

Diversifying your portfolio is a way of mitigating your risk. In practice, it basically means building a portfolio of stocks from different sectors. The theory goes that if a sector is underperforming, any losses created as a result can be offset by gains in stocks in other sectors that are performing well. 

All investing and trading are risky. You can make a profit, but you can also make losses. Any steps to help lower your risk should be taken. Understanding stocks and learning how stock trading works will help you do just that. Remember to do careful research when picking equities to add to your portfolio. 

Where do stocks get their value? 

A stock’s value comes from the principles of supply and demand. High demand usually means a higher price; low demand usually means a lower price. Another factor that gives a stock value is the ROI it can give to investors and traders.  

Investors might look at stocks with strong fundamentals. Other this smaller, under-appreciated businesses are the best companies to invest in, as they might have great growth potential. What you choose is up to you, but a blend of technical and fundamental analysis will give you a clearer view of the markets and help inform your choices. 

There are some methods you can use to find out a stock’s valuation and whether it has been under or overvalued. 

Which cap fits? 

Away from asset classes, stocks can also be grouped according to their market capitalisation or market cap. This is a key part of learning the stock market.  

This is how market cap is calculated: 

  • Total outstanding company shares x share price 

There are no official market cap groupings. However, the market generally divides companies into the following groups. 

Group  Value 
Mega cap  $200 billion or over 
Large cap  $10-200 billion 
Mid cap  $2-10 billion 
Small cap  $300 million – $2 billion 

 

There are also micro and nano cap stocks, covering up to $300 million. 

Mega and large cap stocks are generally thought to have less growth potential but are more likely to weather challenging market conditions. Smaller stocks may offer higher returns, but this is tempered by potentially high volatility.  

Dividend stocks 

A dividend is a portion of a company’s profits it can choose to return to shareholders. Dividend stocks are those that pay out this little reward.  

Not all companies pay dividends, but those that too tend to be popular stock picks. You might consider them if you’re going for a long-term investment strategy. They may be some of the best shares to invest, so if you’re learning the stock market read up on dividend stocks. 

Investing, trading & risk 

Trading and investing are both risky. You can make money, but you can also lose it if stocks turn against you. Only pursue these activities if you can afford any potential losses. 

How to diversify your portfolio for 2021

Equities
Investments

Portfolio diversification is something all successful traders practice. Unsure where to start? Here’s a look at how you can diversify your stocks portfolio this year.

Diversifying your portfolio

What is portfolio diversification?

Essentially, portfolio diversification is about protecting yourself against risk. The concept can also help you improve your risk adjusted returns. Those are how much profit can you potentially make against your inherent risk.

A diverse portfolio contains open positions across a range of instruments and assets. This way, you’re not overly exposed to a single type of risk. Investors and traders use a multi-asset portfolio to balance potential risks, which can help create higher returns in the long run.

Why should you diversify your portfolio?

In an ideal world, all of your trades will turn a profit. Unfortunately, that’s not always the case. If you’ve put all your eggs in one basket, and gone all out on a single asset, you’re opening yourself up to a potential major loss.

This is especially true if you’re trading CFDs. Because these use leverage, you can open a position using a fraction of the total trades value. Great, but while that can multiply your profits, it can heavily multiply your losses too.

By spreading your capital across a wide variety of assets and sectors, you can protect yourself against this. Potential losses from one area of your portfolio that is underperforming can be offset by profits from other sectors.

This is why investors and traders use a multi-asset portfolio to balance potential risks, which can help create higher returns in the long run.

Picking instruments & assets to diversify your portfolio

There is a wealth of different diversified instruments available to traders who want to create a wide-ranging portfolio.

Equities

The most obvious choice for investors are equities, i.e. shares. It’s important to select a number from across different sectors and geographies, so as to create diversification in your shares. By doing so, you can avoid historic pitfalls.

For instance, tech stocks were hammered when the dotcom bubble burst around 2000. Financial stocks were hit hard during the Great Recession of 2008, thanks to the subprime mortgage crisis. Flash forward to 2020, and hospitality and travel stocks have taken a beating due to Covid-19 pandemic induced lockdowns. Investing across a further of stocks in broad number of sectors can help you mitigate losses.

CFDs

CFDs or contracts for difference let you trade shares without owning them. Instead, you’re trading the difference between price points when the underlying asset moves up or down. The same principles that apply to stocks also apply here: trade CFDs across a number of different sectors or asset classes to mitigate against potential losses. It’s diversification 101.

ETFs

ETFs are exchanged traded funds. They are investment instruments that track a group of markets, instantly offering diversification in one package. ETFs can include a variety of assets, including shares, commodities, currencies, and bonds. They are passive instruments, so they mirror the returns of the underlying market and will not outperform it. They can help diversify your portfolio by giving exposure to numerous assets with a single position, potentially lowering risk.

Bonds

Bonds are fixed-income instruments representing a fixed amount of debt. They are most often issued by governments or corporations, paying regular interest payments until the loan the bond is drawn from is repaid. There are several different varieties of bond, so you could potentially create a diverse portfolio of just bonds.

They are generally considered a more secure investment, due to their comparative low risk. Warren Buffet is a big fan. In a 2013 letter to Berkshire Hathaway shareholders, the investment ace instructed his wife to put 10% of his $80bn fortune into government bonds as a secure way of hedging bets against the future.

Commodities

Commodities are bulk tradeable assets. Think products like oil, natural gas, metals, gold, crops, and so on. Rather than straight up buying the asset in question, you can trade futures contracts, i.e. agreements to exchange an asset for a set price on a set date, to get exposure to commodities. ETFs are often used to provide diversification in commodity trading, as they bundle together a group of commodities together, but you can also explore further by investing in companies involved in the production, mining, and selling of companies.

Asset allocation

Another important part of diversifying a portfolio if asset allocation. A good rule of thumb is not to put too much capital into any one specific sector or asset class. Again, this is all about mitigating your risk. If you had 80% of your capital tied up in a single stock, and 20% spread across multiple asset classes, then the potential losses from the single stock may completely outweigh any profits from the remainder of your portfolio. You could thus end up taking a heavy net loss.

It’s all about balance, which the example diverse portfolio below will show.

An example diversified portfolio

David Swenson, the investor in charge of overseeing Yale University in the US’ investments, is a good example to follow. According to the New York Times, David has managed to get 16.3% annualised ROI on his investments over the past 20 years of managing Yale’s endowment, worth around $20bn.

In that 20 years, we’ve seen some tough market conditions. The Great Recession, for example, put massive, massive pressure on financial markets globally. Through diversification, David’s portfolio has been able to weather such storms, and continues to deliver significant returns.

Here’s what David’s diversified portfolio looks like:

  • 30% – US stocks
  • 15% – International stocks from Developed economies
  • 5% – Emerging markets stocks
  • 20% – Real estate funds
  • 15% – Government bonds
  • 15% – Treasury inflation-protected securities

You’ll note no single choice represents an overwhelming section of David’s portfolio. Any underperforming sector’s losses will potentially be covered by the other parts of the portfolio, thus mitigating the risk factor.

How to diversify your portfolio

Step 1: Open your account

Firstly, you’ll need to create an account with Markets.com.

That way you can get access to our trading platforms and instruments.

You can use the Investment Strategy Builder to power your own investment strategy or use one of our ready-made options to invest with a little extra help.

Alternatively, use Marketsx to select and trade thousands of CFDs across commodities, shares, and more diversified instruments.

Step 2: Choose your assets

Remember, variety is the spice of life, and the same is true with portfolio diversification.

Over 2,200 CFDs are available on our platform, covering all the major asset classes.

Think about what you want to achieve, and also your commitments and budget. You may want to diversify your portfolio without investing too much. Consider your risk too. Do you have enough capital to trade comfortably?

With that in mind, consider your assets. Do you like the look of oil futures and gold? What about US technology stocks on the Nasdaq vs FTSE 100 performers from the UK? Geography and sector will all play into your decision making here, but as we’re talking about diversification, it’s an idea to take a broad brush and choose from a range.

Always do your due diligence before investing though.

Step 3: Open your positions

Use our platforms to place your first trade.

Step 4: Monitor your positions

Monitoring and evaluating your diversified portfolio very important if you want your trades and investments to succeed. This is not a one-time thing. You must keep things balanced.

Keep an eye on your investments to ensure you’re not exposing yourself to risk you are uncomfortable with.

You might have personal matters that impact your risk tolerances, such as a change in financial circumstances, or your long-term goals might change. In more extreme cases, the risk profile of your assets might change, i.e. a stock market crash.

It’s also necessary to know when to close a position. Be sure to keep up to date with any changes in market conditions, so that you know when it’s time to close your trade. Once you close one position, it’s a good idea to look at how you will readjust your portfolio.

Trading oil: CFDs vs futures

If you want to trade oil, you will have to understand the differences between CFDs and futures. Luckily, we’ve put together this handy guide to help you get started with crude oil trading. 

How to trade oil: CFDs & futures 

CFDs (contracts for difference) and futures contracts are two of the most popular ways to trade crude oil. They may seem similar, but the two are separated by some important differences. Understanding both will help you adapt oil commodities into your own unique trading style. 

Futures contracts 

Futures are contracts in which an exchange for a set amount of oil to be sold at a set price on a set date is agreed upon.  

Exporters and importers use futures to insure against any potential adverse effects of oil price volatility. Typically, oil futures are for contracts on 1,000 barrels of oil. A $1 price movement equates to $1,000 here. Futures contracts are settled on the physical delivery of oil but can also be settled with cash too. 

WTI and Brent are two of the three major oil benchmarks. These are oil blends used to gauge oil prices around the world. The other benchmark is Dubai Crude. 

Specific oil futures are traded via commodities exchanges. Brent futures are traded on the Intercontinental Exchange (ICE) in London, as Brent refers to a blend of oil extracted from fields in the North Sea. WTI futures are traded on the New York Mercantile Exchange (NYMEX). WTI stands for West Texas Intermediate, historically coming from oilfields in Western Texas. 

There is often a high level of complexity involved in professional oil trading, hence why it is most typically done by professional oil traders.  

Oil CFDs 

Oil CFDs are a much more accessible way for retail traders to speculate on the oil share price without the need for the substantial collateral required to trade futures contracts, or without having to physically own any oil. Oil futures CFDs simply mirror the movement of the underlying contract. 

CFDs are leveraged products. They give you market exposure for a percentage of the full trade you wish to make. This means that you can potentially make profits if the market moves in your favour. 

You can also lose money if the market moves against you and you are not using adequate risk management tools. 

Let’s look at an example.  

With a WTI CFD, you would be trading on the price movements of a minimum of 10 units of WTI oil (i.e., ten barrels). 

If the oil price is $60 per barrel, your exposure would be $600 (10 x 60). As oil futures use 10% leverage as standard, your initial margin would be $60 (10% of $600).  

If the price of oil rises by $1, you would then make 10 x $1. If the price fell by $1, you would lose 10 x $1, because you are trading on margin. 

Moreover, in addition to CFDs of futures contracts, it is possible to trade Spot Oil as a continuous contract which does not expire. If you are thinking about trading oil via CFDs, please be aware of the risks. You can make profit, but you can also make big losses. Only trade if you can afford to lose money. 

What affects oil prices? 

The crude oil share price, and oil prices in general, are affected by lots of different things, including demand for oil, production costs, output, geopolitical events in the Middle East, decisions by OPEC and Russia, the seasonal driving habits in the US – the world’s largest crude market (10% of global daily oil demand depends on gasoline demand from American motorists), cyclical economic growth and numerous other factors.   

For example, the oil price dropped massively at the peak of the Covid-19 pandemic. That’s because the restricted movement of people and goods meant there was less demand for fuel oil. Fewer people around the world were traveling by car, boat, or plane 

Technological shifts that allow for cheaper production have also altered pricing structures. For decades, WTI was traditionally priced higher than Brent Crude. With the advent of shale extraction technology and WTI price declines, Brent now usually trades at a higher price than West Texas Intermediate. 

Oversupply has been a persistent problem in recent years. You may hear of a glut on oil markets. That’s when oil production outstrips oil demand. OPEC, and allies keep a close eye on oil production levels because of this. Since the Covid pandemic, for instance, OPEC and allies have introduced production cuts. 

US oil stockpiles are also carefully monitored. The US, as the current world’s largest economy, is the largest consumer of oil globally. In 2019, it was using over 19 million barrels of oil per day. Because of this, the volume of oil the US keeps stockpiled is carefully watched by oil traders. 

The Energy Information Administration’s (EIA) Crude Oil Inventories report is published every week, usually on Wednesdays at 15.30 GMT. This measures the weekly change in the number of barrels of commercial crude oil held by US firms. 

If there is a higher-than-expected increase in crude inventories, that may mean weaker demand, and may mean oil prices fall. The same can be said if a decline in inventories is less than expected. 

 If the increase in crude inventories is lower than expected, that may mean demand his higher, which means prices may rise too. The same can be said if a decline in inventories is higher than expected. 

The US Oil rig count is also watched closely by oil traders. As This counts the number oil rigs functioning in the United States. It’s important to track because it can give an idea of how much oil production is occurring.  A lot of oil being produced can mean high demand, which in turn can mean high prices. Low production can mean low demand, thus lower prices. However, if there is a lot of oil being produced, but low demand on the market, this can cause a glut, and subsequently lower prices.

Day traders are beating Wall Street pros

CFD Trading
Equities

Some of the world’s top money managers have been outperformed by retail day traders recently.

Goldman Sachs reports that a portfolio of stocks traded by retail investors grew 61% in March, compared to just 45% for a basket of hedge fund picks.

Watch our video to find out more and discover how Marketsx stock trading tools can give you the edge when trading the most popular stocks amongst both retail investors and hedge fund bosses.

Find out more about our stock trading tools here.

How trading stocks works

Trading stocks involves buying and selling the stock of publicly-listed companies in order to potentially profit from favourable changes in price. There are thousands of stocks to choose from, across dozens of industries, but while each stockfundamentals may differ, there are some basic principles that govern how trading stocks works. 

How Trading Works in the Stock Market 

Stocks, also known as shares or equities, grant the holder ownership of a fraction of the company issuing the stock. Investors in Amazon own a small piece of Amazon. This grants them rights, such as the right to vote on certain business decisions. Some shareholders also receive quarterly payouts called dividends. But traders buy and sell stocks primarily to benefit from the changes in price. 

There are two ways that stocks are traded: via exchanges, or over the counter (OTC). 

Likely the most well-known example of how trading works in the stock market is the New York Stock Exchange (NYSE). As the name implies, this is an exchange-based method of trading, where buyers and sellers come together on the trading floor to place trades. 

Brokers take orders from their clients and pass these on to the traders on the floor, the floor traders then find a trader who wants to make the opposite trade (so a trader looking to buy Facebook shares needs to find a trader whose client has Facebook shares they are looking to sell) and conducts the trade. 

Many exchanges, like the Nasdaq, conduct trades electronically, matching buyers and sellers without them having to physically meet. 

Over the counter trades are those made directly between parties, without an exchange acting as a market maker between them. Trading stock CFDs with Marketsx is an example of an OTC trade. 

Trading Stock CFDs 

Contracts for Difference (CFDs) are derivatives that track changes in price of an underlying asset. A stock CFD will move up if the underlying stock appreciates in price, and move down if the same asset depreciates. 

Trading stock CFDs has many advantages over buying and selling shares directly. Trading CFDs allows you to short a stock as well as going long. They also allow you to take much larger positions in a company than your capital may allow thanks to leverage, especially considering the stock of some companies trades for hundreds, or even thousands, of dollars per share. 

Remember, leverage can increase your losses as well as your profits. 

Making a stock trade 

Trading stocks on the Marketsx platform is a straightforward process. Search or browse for stocks to trade, then click on the Buy or Sell button above the stock chart. You can also open a position by right-clicking on the chart. 

The order ticket contains all the information you need to confirm the trade. Set the desired trade size and click the button to place the trade. The order ticket also allows you to set stop loss and limit orders.

When your position reaches a desired level of profit, or losses are too high, you can close the position with the click of a button.

CySEC (EU)

  • Client’s funds are kept in segregated bank accounts
  • FSCS Investor Compensation up to EUR20,000
  • 1,000,000 insurance cover** 
  • Negative Balance Protection

Products

  • CFD
  • Share Dealing
  • Strategy Builder

Markets.com, operated by Safecap Investments Limited (“Safecap”) Regulated by CySEC under licence no. 092/08 and FSCA under licence no. 43906.

FSC (GLOBAL)

  • Clients’ funds kept in segregated bank accounts
  • Electronic Verification
  • Negative Balance Protection
  • $1,000,000 insurance cover** 

Products

  • CFD
  • Strategy Builder

Markets.com, operated by Finalto (BVI) Ltd by the BVI Financial Services Commission (‘FSC’) under licence no. SIBA/L/14/1067.

FCA (UK)

  • Client’s funds are kept in segregated bank accounts
  • FSCS Investor Compensation up to GBP85,000
    *depending on criteria and eligibility
  • £1,000,000 insurance cover** 
  • Negative Balance Protection

Products

  • CFD
  • Spread Bets
  • Strategy Builder

Markets.com operated by Finalto Trading Ltd. Regulated by the Financial Conduct Authority (“FCA”) under licence number 607305.

ASIC (AU)

  • Clients’ funds kept in segregated bank accounts
  • Electronic Verification
  • Negative Balance Protection
  • $1,000,000 insurance cover**

Products

  • CFD

Markets.com, operated by Finalto (Australia) Pty Ltd Holds Australian Financial Services Licence no. 424008 and is regulated in the provision of financial services by the Australian Securities and Investments Commission (“ASIC”).

Selecting one of these regulators will display the corresponding information across the entire website. If you would like to display information for a different regulator, please select it. For more information click here.

**Terms & conditions apply. Click here to read full policy.

Marketsi
An individual approach to investing.

Whether you’re investing for the long-term, medium-term or even short-term, Marketsi puts you in control. You can take a traditional approach or be creative with our innovative Investment Strategy Builder tool, our industry-leading platform and personalised, VIP service will help you make the most of the global markets without the need for intermediaries.

La gestión de acciones del grupo Markets se ofrece en exclusiva a través de Safecap Investments Limited, regulada por la Comisión de Bolsa y Valores de Chipre (CySEC) con número de licencia 092/08. Le estamos redirigiendo al sitio web de Safecap.

Redirigir

Are you lost?

We’ve noticed you’re on the site. As you are connecting from a location in the you should therefore consider re-entering , which is subject to the product intervention measures. Whilst you’re free to browse here on your own exclusive initiative, viewing the site for your country will display the corresponding regulatory information and relevant protections of the company you choose. Would you like to be redirected to ?