CFD Trading UK – 2021 Market Outlook
CFD Trading has grown by 33% with 550,000 active users in 2020, meme stocks crypto currencies e.g. GME and Dogecoin has boosted the interest. Skilling, eToro and Plus500 are leading the way in the UK CFD market.
About CFD Trading
CFD trading is defined as ‘the buying and selling of CFDs’, with “CFD” meaning “contract for difference”. CFDs act as an instrument allowing the investor to speculate on the price of underlying assets without taking actual ownership in the shares, FX, ETFs or crypto. The online trading platforms are giving retail traders access to a way of investing only exclusive to professionals before.
Fastest Growing UK CFD Brokers 2021
- Skilling – new entrant on the UK market with an intuitive platform and trading app with zero commission, has grown quickly since COVID with a top of the line product with +800 instruments, regulated by FCA and CySEC. Started in 2016, with multinational offices in the UK Malta, Spain, and Cyprus.
- eToro – is a soon to be public company with its roots in Israel, with a large +800 stocks and is regulated by the FCA, CySEC, and ASIC. eToro is an established platform launched in 2010, mainly differentiated by their social trading.
- Plus500 – a leading CFD trading platform listed in London, +2000 stocks, regulated by the FCA, CySEC, and ASIC. Plus 500 has been operational since 2008 and subsidiaries are regulated in several countries around the world including the UK, Singapore and Australia.
CFD Trading in the UK
The United Kingdom are now considered mature markets in the CFD- & FX- trading space. The UK population has had access to CFDs since the end of the 90s but it was truly popularized in the last few years. By Q1 2022, GDP could have completely recovered to pre-COVID-19 values. Along with which the outlook for growth from 2023 to 2025 seems to be more optimistic for markets.
- Almost 560,000 customers traded CFD products each month in 2020, a year over year increase of 32%.
- We estimate that this number will reach 720,000 in the second half of 2021.
- There were over 1,000,000 CFD-funded retail client accounts in 2020.
- There are 110 different CFD trading platforms licensed by the FCA.
Why has CFD trading surged?
“The main reason is Covid has provoked volatility in the markets. CFD trading present an opportunity to generate profits in both swings of the market. From the beginning of last year when many shares sunk 60-70% to the impressive recovery where growth shares and crypto currencies saw a surge of up to 6x, traders have been able to profit both ways.” Adrian Reading, Head of Research, Trading Authority
Product reasons for the rise of CFD trading
- Limit leverage between 30:1 to 2:1 for retail traders, up to 500:1 for professional traders
- Low capital requirements
- Shares, trade indices, commodities, forex
- No direct fees for financing
- Access to global trading on one platform
New Generation of traders – “meme stocks”
“The quarantines and increasing popularity of tech and “meme” stocks fueled the popularity of short-term speculation, often accelerated by the power of social media and forums such as reddit. Twitter has been a useful tool for detecting sentiments in the markets but now platforms such as reddit.com and Discord has emerged as new trading information hubs for retail traders.”
“Communities such as wallstreetbets, popularized by traders on RobinHood (US online broker), drove the surge Gamestop (GME) up to never previously seen levels, by crowdsourced investment theses, memes and print screens of extraordinary profits. As many other trends nowadays, they originate in the US to then be quickly spread across global borders. Leveraged retail trading is just one of them”
Europe and the UK has long been serviced by the traditional banks and trading houses online platforms, but we can since the beginning of the new millennia see a new generation of online platforms that are native in the digital space, platforms such as Skilling, eToro and Plus500 have emerged with platforms premiering convenience, new UX and portfolio of trend sensitive underlying assets. These platforms have been natural destination for a new generation of traders, used to sophisticated digital products.
New destination for retail investors, CFD trading for the masses
By the other end of the spectrum, the older generations have found CFD trading after being restricted to a limited range of investment opportunities provided by traditional banks. The new marketing reach and familiarity of CFDs have diversified portfolio and shifted capital away from the banks. Low interest rates have been an additional factor to the search for new investments.
The new retail traders are well protected by the FCA, the increasing level of regulations to mitigate the high loss percentage, around 70% of retail accounts lose money, but there is still a need for education of the average trader.
Ban on Crypto-derivatives in the UK
The FCA banned the sale of crypto-derivatives in the end of 2020 due to unreliability of the valuations of crypto currencies. “The FCA considers these products to be ill-suited for retail consumers due to the harm they pose.”
In detail the FCA reasoned:
- inherent nature of the underlying assets, which means they have no reliable basis for valuation
- prevalence of market abuse and financial crime in the secondary market (e.g. cyber theft)
- extreme volatility in cryptoasset price movements
- inadequate understanding of cryptoassets by retail consumers
- lack of legitimate investment need for retail consumers to invest in these products
Protection of investors led by the FCA
It’s important to remember that all forms of trading offer risk as well as potential reward. So, before you start exploring the world of CFDs, be sure to do thorough research.
COVID-19 and Brexit, as well as the resulting threats to trade and supply chains, could drive a move away from just-in-time manufacturing and toward higher domestic demand. The FCA have taken a range of measures to protect retail traders:
- CFD brokers are limited in the amount of leverage they can provide to CFD traders and must use a standardized close out level of 50% of the required margin of a transaction.
- CFD trading platforms are also required to provide a negative balance protection, which means they cannot suffer losses greater than their deposits.
- If the CFD trading platforms become insolvent the traders are protected by a Financial Compensation Scheme up to £85,000.
The last few years of CFD trading in the UK
CFD brokers differentiate on available markets and instruments, rates, fees, trading app capabilities, and customer support. Following all the market activities from 2008 to 2018, investors came to see CDFs as a strong investment option in 2019. The pattern has been accelerating in 2020, so hopes for 2021 are high.
Traders can undertake trades in all market climates, allowing you to forecast price that follows the fundamental research in both bear and bull markets.
Contracts for difference or CFDs were introduced to the market in 1990s but have gained increasing popularity in 2020. CFD trading is a beneficial instrument to investors, they allow them to take long and short positions without holding the underlying asset. You are speculating on the increasing or decreasing price of an asset – without owning it. Trading on margin or leveraged trading require less capital investment than buying shares.
CFD trading can be used for short term trading profits on trends and movements in the market or to hedge/offset losses on your share portfolio.
The CFDs are offered for a wide range of financial assets e.g., shares, ETFs, FX, ETFs, commodities, Bitcoin, Dogecoin, Ethereum, and many other. The financial regulations enforced by the FCA, have limited the leverage and risk for traders by putting a ceiling on leverage and providing negative balance protection.
The equation behind the profit from your position is based on the difference between the buy and sell prices, less any fees incurred while holding the position. Cost such as holding and for opening the position are automatically deducted from your trading account. The buy price/sell price – initial buy/sell price – interest cost x days – transaction costs = profit or loss.
Trading on a margin means exponential profits based on the initial investment, but also the risk that any losses will be magnified. To manage risk traders should be aware of position sizing and how to use a stop loss.
CFD Trading Prognosis for 2021:
- The Pandemic: The tragedy, according to the positive prognosis, will be over by June thanks to a surge in vaccine manufacturing. According to experts, the vaccine will halt the spread in fewer than 100 days.
- Bitcoin’s Expansion: Outside of the UK, almost all cryptocurrencies have increased significantly in value in 2020, with Bitcoin tripling. Ethereum saw a recent surge after the rising popularity of NFTs. New altcoins such as Dogecoin have a newfound popularity driven by memes and internet forums. Based on fear of future inflation and uncertainty in the stock market many investors have hedged their portfolios with crypto currencies.
- Bond prices are down: Bond yields are projected to fall in tandem with the high inflation rise that is expected in 2021. If you look at the negative rates in the UK, you will see the pattern.
- The year 2021 will provide us with the key answers to what awaits us until 2026. We don’t know when the pandemic will stop, whether Biden’s policies will lead to economic crises, and so on. Nonetheless, CFDs will grow in popularity as a tool for risk management and hedging.
When choosing the CFD trading platform, there are several key points to investigate to know the right fit. They are pricing, fees and commissions, market accessibility, opening times, account balance and deposit security (FSCS, etc.), features, order platform, market tools, and educational services.
Trading Authority is a privately owned financial services industry research company based in London, UK. We deliver independent, deep insights research on the behaviours, preferences and needs of retail investors and intermediaries for the financial services companies that serve them across Australia, Singapore, Hong Kong, France, Germany, Spain, and the UK.
For more information about this country profile visit https://trading-authority.com
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Research and Markets
Mark Adams, Senior Manager