The Ultimate Guide to CFD Trading in Canada

Contracts For Difference, or CFDs as they are more commonly known, are financial products that allow Canadians to make a wager on the price movement of an underlying asset. CFD trades can be made on a variety of assets including stocks, indexes, forex, commodities, and even cryptocurrencies. 

For most investors in Canada, CFD trading will likely be too risky to take on. But if you are curious about how CFD trading works, you’re in luck. This article is our ultimate guide to CFD trading in Canada and will provide you with everything you need to know about trading Contracts For Difference. 

What is CFD Trading?

CFDs are a type of financial derivative that creates an agreement between a trader and a CFD brokerage. The trade is based on the price movement of the asset, specifically the difference in prices between when the CFD was opened and closed. 

With CFD trading, no actual shares or assets are exchanged during the trade. The gains or losses are determined by the price of the CFD contracts and the direction of the price of the underlying asset. 

Because there are no shares or assets involved, CFD trading takes place using leverage, also known as margin trading. This allows traders to trade using a smaller amount of cash as collateral for the CFD contracts. The drawbacks to margin trading are that you can wipe out your entire account and owe for the entire value of your CFD contracts. You also pay monthly interest on the balance of your margin account. 

If CFD trading sounds risky, you’re correct. Trading on the stock market can always come with risks, but these are amplified when you involve directional bets on price and trading on margin. How risky is CFD trading? While CFD trading is legal in Canada and other countries, the SEC has banned it in the United States. 

How Do You Profit From CFD Trading?

CFD trading is a unique way of playing the stock market. There is no expiration date for a CFD contract so you can close out your trade anytime you want. Theoretically, if you make a bullish bet and buy a CFD contract, you can hold it until the trade is in the green. But if the stock continues lower, the losses on the contract will be magnified. 

When you make a CFD trade you can position yourself to be either long or short. If you are long it means you believe the price of the asset will rise in the future. In this case, you would buy a CFD contract. But if you are short the asset you are betting the price will fall. In this case, you would sell the CFD contract. 

The profit is made when the price of the asset moves in the direction of your CFD contract trade. This profit is realized when you close the CFD trade with your brokerage. If your trade was correct, then you will be paid the difference between the current price of the asset and the price of your CFD contract. But if you were incorrect, you will owe the difference. 

CFD Trading vs Options Trading

The description of a CFD trade and an options trade sounds similar on the surface. Both are financial derivatives that are used to trade the direction of the asset’s price. Both use contracts rather than trading the actual shares or assets. But that is where the similarities between CFDs and options end. 

For starters, options contracts have expiration dates. The expiration date is the key to the value and action of the option contract. At that date, or before it, the contract must either be closed, exercised, or left to expire worthless. 

As we mentioned, CFD contracts have no expiration dates and can be closed at any time. For the most part, CFD trades are only open for a few days to a few weeks. 

With CFD contracts, the profit or loss is determined by the variation in the price of the asset when you open the trade. For options, it is based on the right, but not the obligation, to buy or sell the asset at a set price by the expiration date. 

Best CFD Brokers in Canada

Although it is heavily regulated by the Canadian Investment Regulatory Organization (CIRO), CFD trading is fully legal in Canada. The problem is, most of the best Canadian brokerages do not offer CFD trading. 

None of the big bank brokerages have CFD trading and only a handful of others in Canada do. Brokerage comparison tools can be a great way to figure out what features are offered by various firms in Canada.

Friedberg Direct

The Friedberg Group is a Toronto-based financial institution that manages over $2 billion in assets. It was founded in 1971 and is a family-owned and operated business. Friedberg Direct is the brokerage arm of the Friedberg Group that uses AvaTrade’s online brokerage technology. Friedberg Direct is dealer regulated by the Investment Industry Regulatory Organization of Canada (IIROC).

CFD trading with Friedberg Direct is easy and can be made on individual stocks, ETFs, commodities, futures, foreign exchange, and bonds. The cost of a CFD trade on Friedberg Direct is the Buy/Sell spread of the asset multiplied by how many contracts you purchase or sell. You can begin trading CFDs on Friedberg Direct with as little as $250 cash. 

Questrade

Questrade is one of the oldest discount brokerage in Canada and has over $30 billion in Canadian investment assets under management. It is also one of the few brokerages in Canada that offers CFD trading to its users. 

At Questrade, you can trade CFD contracts for a wide range of commodities including crude oil futures, gold, corn, and wheat. You can also trade CFD contracts for major stock indexes like the S&P 500 and the NASDAQ 100, as well as a long list of international markets. Finally, you can trade CFD contracts for stocks from around the world. 

CFD contracts at Questrade come with a specified target spread and minimum order costs. There are also additional rollover costs for some assets, carrying costs for margin, and overnight financing costs. 

Interactive Brokers

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Interactive Brokers is one of the more popular trading brokerages for experienced traders. It is a global company that has its headquarters in Greenwich, Connecticut but operates in more than 150 markets worldwide. As of 2023, it has more than 2 million users. 

CFD trading at Interactive Brokers is available for Canadian users. The platform provides low commission fees for CFD shares, metals, commodities, and forex. Since IBKR is a global brokerage, it provides access to an impressive number of foreign markets. The list includes assets from the US, Brazil, Hong Kong, Singapore, and the EU. 

CFD Trading and Margin 

Using a margin account is a fact of life when it comes to CFD trading in Canada. This is true no matter which brokerage platform you decide to use. But what is margin trading and what are the risks? 

In the financial world, margin trading gets a bad reputation. Margin trading means you borrow funds from the brokerage to use for trading. In exchange, you only have to put up a small amount of cash called the margin requirement. For Canadians, the margin requirement can be as low as 5.0% for CFD trading.

Is margin trading risk? Absolutely. If you are trading with margin and the trades go against you, then the brokerage could issue a margin call. This is when the brokerage can demand that you repay your margin loan and can even force liquidate some of your assets to do so. This is one reason why margin trading should be left to experienced and advanced traders. 

Margin trading is heavily regulated in Canada by the IIROC. This is in order to protect Canadian investors from being wreckless with margin loans. 

With a 5.0% margin requirement on a $20,000 margin loan, you only need to provide $1,000 cash. Think of this as the deposit to secure your margin loan. Once you have the loan you can trade it as you wish, but it is important to know that any losses could far exceed your margin requirement. 

CFD Trading Fees

CFD trading comes with its fair share of brokerage fees. These can add up so be aware of the fees involved before entering any CFD trades. Here are a few of the fees you might encounter on your brokerage:

Rollover Costs

Every brokerage handles rollovers differently. For CFD trading, rollover fees are referring to the cost of holding contracts open past dates of expiration. This usually means for assets that have an expiration date like monthly futures contracts. 

CFD Carrying Costs

CFD carrying costs refer to holding the contracts open overnight. This is usually calculated by using the daily margin requirement as a gauge. This is one reason not to hold CFD contracts for a long period of time. 

Interest on Margin Loan

When you are trading using margin you will always need to pay interest on the amount you borrow. Margin loans usually come with a specified interest rate for which you will need to make regular payments. 

Advantages of CFD Trading

Wide Range of Assets

CFD Trading allows you to gain exposure to a number of different assets. This allows greater flexibility for your portfolio as you are able to speculate on everything from commodities to foreign stocks to cryptocurrencies. 

No Expiration Dates for CFD Contracts

There are no expiration dates for CFD contracts which means you can close them at any time. It also means that you can leave them open until you are back in a profitable trade. Just know that you will need to pay brokerage and margin fees until you close out your trade. 

Potential for High Profit 

As with other leveraged derivatives, CFD trading allows you to potentially make a high profit for a low initial investment. Since CFD trades are made in margin accounts, you will only need to have the margin requirement amount. Leveraged trading allows you to earn higher gains for less upfront money.

Disadvantages of CFD Trading

Margin Trading is Risky

Trading on margin definitely is not for everyone. While the potential for higher profits is there, so too is the potential for larger losses. Margin trading should be left to experienced traders who know how to mitigate risks and avoid total losses. 

CFD Trading Fees

As mentioned, CFD trading can come with much higher fees than individual stock trading. There is the margin interest, the spread cost, overnight funding, and rollover fees. Before getting into CFD trading, you will want to make sure that your profit margin is worth it even after all of the included fees. These fees can have a significant impact on your realized gains.

Is CFD Trading For Me?

CFD trading has plenty of benefits for Canadian traders. There is the potential to make large returns with a smaller initial investment. It is also a way of trading assets without needing to own them. It differs from options trading because it provides more flexibility without a contract end date. 

If you are considering CFD trading, there are only a handful of brokerages in Canada that offer it. You will need to sign up with either Questrade, Interactive Brokers, or Friedberg Direct. You are also encouraged to start practicing CFD trading with a paper trading account first. Since it is leveraged trading, any substantial losses can cost you significantly more than you put up as your margin requirement.

FAQs About CFD Trading in Canada