Investing > CFD Trading in the USA: Explained

CFD Trading in the USA: Explained

Trading CFDs can be very risky, which is why they're surround by strict regulation—especially in the US.

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Updated January 10, 2022

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Want to start day trading CFDs but live in the United States?

Using an investment product like CFDs can be very useful as you can invest in assets and potentially amass financial gains without needing to put down a large amount of money to begin. This might sound a bit too good to be true, and it sort of is.

Although CFDs can help you generate profits quickly, they can also cause you to lose more money than you have. ⚠️

This is known as leveraged trading, and while it can be helpful to place trades without capital, this also increases your risk. Trading CFDs is one of the riskiest financial products on the market, especially if you don’t know what you are doing. This is why Americans will find themselves not allowed to register on financial platforms to trade CFDs. 

But if you want to try them out anyways, there are options if you look overseas. The list of countries that accept and encourage this form of trading is increasing—recently, Australia changed their CFD regulations to make trading these products even more attractive to investors than before. 

So if you are interested in trading CFDs, keep reading as there is lots of important information you need to know before you begin. And even if you find that you live in a country where CFDs are illegal, it is possible that the government could change the laws and, someday, you will be able to legally trade CFDs.

What you’ll learn
  • How CFD Trading Works
  • CFD Fee Structure
  • Cost-Effectiveness of Trading CFDs
  • Foreign Markets
  • CFD Taxes Explained
  • How Leverage Works with CFDs
  • Shorting with CFDs
  • Limitations of Trading CFDs in the U.S.
  • Guide to Trading CFDs in the U.S.
  • Legalities of CFDs in the U.S.
  • CFD Trading in the US: FAQs
  • Get Started with a Broker

How Does CFD Trading Work? ⚙️

CFD stands for contracts for difference, and when you purchase a CFD, you are purchasing a product from a broker based on speculation in regards to a particular commodity. This means that you are not actually purchasing a commodity or stock, but rather you are placing a type of bet on the change in price a certain commodity will experience. 

CFD Price Explained
When purchasing a CFD, you are placing a type of bet on the change in price a certain commodity will experience.

This is done via an agreement, where a day trader agrees with a broker that they will pay the difference in the price of a security at the end of a contract. Then, if the price rises or drops in the direction they predicted, they will be paid by the broker for their investment. 

The reason many people choose to trade CFDs is because you can trade on a margin of 3-5%. This means you only need to put down 3-5% of the value of your trade to get started. This makes it much easier to day trade when you have little to no capital. 

This is a double-edged sword, however, because trading on such a small margin means that you are using lots of leverage–a term used in the day trader world to indicate you are essentially trading with money you don’t have–and this means that you can potentially lose a lot of money trading CFDs. For this reason, CFDs are currently banned in the United States for all citizens and residents. 

CFD Fee Structure 🧱

One of the reasons many people love trading CFDs is because of their low fees. This low fee structure makes trading CFDs much more profitable than trading with a traditional broker. 

The most common fee when trading CFDs is called the spread, and this is the difference between the market price and the price you will be charged by the broker. This is how CFD brokers make most of their money. When the market is more volatile, the spread fees will be higher than when the market is more stable because they are typically based on the risk the broker is assuming. 

Another common expense when trading CFDs are the commissions. Some CFD brokers do not charge a commission when trading on commodities and Forex pairs. But there typically is a commission fee when trading stocks. These fees vary based on the platform but are usually around 0.1%.

CFD Trade Example
Commission fees vary based on the platform but are usually around 0.1%.

Additionally, when trading CFDs, there are sometimes interest charges which are charged for each day you hold the position. These interest charges are typically set based on a standard rate established by a central bank in a country where CFDs are legal. These rates can vary from the published rate by plus or minus 2%. 

Basically, in order to make money trading CFDs, you will want to examine the fees of the broker you choose to use. If you are looking solely to day trade, then a broker offering low commission fees will be best. But if you are looking to hold longer-term positions, you will want a broker that has lower interest charges for positions that will last longer than a day. 

Is Trading CFDs in the U.S. Worth it? 🏦

With all these fees and the complicated legality of trading CFDs, you may be wondering if it is even worth it to get involved. Well, the main reason people choose to invest in CFDs in the first place is to gain access to commodities that they can’t bet through normal channels as well as the leverage they can use. 

Foreign Markets 🛍️

When you live in a certain country, you can typically only day trade on the market of that country. This is what makes CFDs so valuable, as they let day traders have access to foreign investments that they normally couldn’t invest in. 

For example, for years, the UK has been the CFD hub of Europe. This is because it allowed European day traders access to American stocks and commodities that they otherwise wouldn’t be able to bet on. After Brexit, the UK is no longer the CFD haven it once was, and instead, traders have turned to Malta and Cyprus to continue trading CFDs because there is no other way for them to easily become involved in the American stock market.

And it isn’t just American markets, as there are traders all over the world that use CFDs to open positions in European countries where they can’t currently invest. Another popular country is China, which allows foreign investors, but only if they meet certain qualifications. And if a day trader doesn’t meet these, CFD trading is his only way to be involved in their Chinese stocks of choice. 

So whether or not you think trading CFDs is worth it, they are an important financial tool used around the world. But even if you do think they are worth it, there are several aspects you need to evaluate before considering an investment. 

CFD Taxes Explained 🧾

When trading CFDs, the profits are not tax-free. Because they are illegal in the United States, there is no tax regulation here specifying the amount of tax they are subject to. In countries like the UK, CFD gains are taxed at a rate of 10-20%, depending on your tax bracket. It is always worthwhile to check the taxes you can expect to pay in your country before you start CFD trading. 

How Leverage Works with CFDs ⚓

In traditional trading, there are regulations that govern the amount of margin a day trader can trade on. These margins are much lower when it comes to CFD trading. This means it is much easier for someone to enter the trading market when trading CFDs because they don’t have to have as much capital to put down. 

How Margin is Calculated in CFD Trading
Lower margins in CFD trading allow easier entrance to the market for someone that doesn’t have much capital to put down.

This is also very dangerous, however, because this low margin, sometimes as low as 3%, means you can put in for trades that are much more expensive than you can afford to pay. So traders should only place trades that they can afford to cover if they have to. 

Can You Short with CFDs? 📉

After the stock market crash of 2008, there are several markets and investing platforms that will not allow you to short stocks. Or they will not allow you to short it without buying the commodity or stock before selling. In CFD trading, this goes out the window as you never own the commodity anyway, meaning you can short your trade at any time you wish. 

The Limitations of Trading CFDs in the U.S. 🛂

As previously mentioned, trading CFDs in the U.S. is illegal. This is because they are an over-the-counter investment product that can’t be regulated by traditional financial institutions. But the good news is, trading CFDs in the United States is only illegal for citizens. This means that non-citizens are welcome to engage in CFD products. 

Because they are illegal in the U.S. for citizens, this means many people turn to investing in CFDs offshore in non-American companies. The problem with this is that it leaves plenty of room for scams as the only companies that will take Americans are companies that are not regulated. Therefore a trader could lose all their money if they pick the wrong offshore company. 

And unlike regulated exchanges, when you lose all your money offshore, the government will not investigate or prosecute. This is an all-new type of risk that many investors are not equipped to handle. This is why it is never advised for an American to attempt to trade CFDs through an unregulated and untested offshore broker. 

How to Trade CFDs in the U.S. (Steps) 🪜

Have you decided that you are ready to trade some CFDs? Below are some steps to follow to get you started. 

1. Find the Right Brokerage Platform 📈

Before you put your hard-earned money on the line, you will want to be sure that you are investing it in a safe place. This means you will  only want to go through the top CFD brokers to be sure they are regulated and reliable. 

When choosing a brokerage platform, make sure to check their fee structure and find out if they are regulated.

If you find that they are indeed regulated, next, you will want to check the fee structure. Remember, you will want to go for different levels of fees depending on the type of trading you intend to do. 

And don’t just dive in, take a few minutes to surf around their platform and be sure you know how to use it. Some platforms may not work for all investing styles. You will want to find this out before you sign up for an account. Two very popular companies for U.S. CFD investors are IG and CMC Markets. 

2. Open Your Account 📒

The next step is to open your account. You will want to take a good look at the account options of the brokerage platform you chose and select the right account for you. Certain accounts have higher fees, and some require minimum balances to be maintained. Be sure to contact customer support if you need help. 

3. Find a Trading Opportunity 💸

When you first open an account, you may not see a trade you like right away. Don’t place any trades you are not comfortable placing. Rather wait for the right opportunity to come to you. Once you do find a position you like, then you can continue to the next step. Be sure that you research any positions you intend to open.  

This is also a good time to develop a trading strategy if you haven’t already. You will also want to decide how much margin you will be comfortable trading on. If you don’t have any investment tools, like a robo-advisor, to help you decide when to buy and sell, it is time to invest in those as well. 

4. Open the Position 📊

Once you find a trade you want to place, then you will want to go through the process of opening the trade on the platform you have chosen. This is also the time to select if you want a stop-loss or a stop-limit order. 

5. Keep an Eye on Your Position and Sell 👁️

Don’t forget to keep an eye on your position, and when it’s time to exit, close your position. Remember that trading takes a certain mindset, so try not to let your heart lead you to close a position. Instead, wait until the investment tools you use to tell you that it is a good time to close. 

Legalities of CFDs in the U.S. ✒️

If you’re an American citizen, it can be disheartening to find out that you can’t trade CFDs, and this can leave you wondering why this regulation is in place. It’s time to take a look at why CFDs are not legal in the United States. 

The short answer to why CFDs are not allowed in the United States is because they are against a law put forth by the U.S. Securities and Exchange Commission (SEC). And this law, called the Dodd-Frank Act, was written in order to protect Americans from the risk experienced when using over-the-counter trading products (among other things). This is because these products do not go through an exchange that the SEC can regulate. 

The main reason the U.S. government is trying to protect its citizens from the risk of OTC investment products is because of the margin these trades usually allow. Because people can wager much more money than they may have on hand, these investments are considered extremely risky. 

Many speculate as to if the U.S. government will allow CFD trading in the future. But, since the stock market crash of 2008 that happened because of a lack of market regulations, it is highly unlikely that the SEC will reverse its decision on products like CFDs anytime soon. 

But there is a chance because the U.S. government is constantly changing and rewriting laws. This means that even if you can’t currently trade CFDs, it is a good idea to learn what they are and how to trade them in case you have the opportunity to do so in the future. 

Conclusion 🏁

Overall, trading CFDs is great for many reasons, as it can let you gain access to foreign markets, as well as let you invest using capital you may not have on hand. But for these same reasons that make CFDs so pleasant and attractive to investors, it also makes them incredibly risky. 

Thus it should come as no surprise that the US government has regulations prohibiting their citizens from investing in them. But as everyone knows, there is always the possibility of change. So don’t brush off the possibility that you, as a US citizen, could be adding some CFDs to your trading portfolio sometime in the future! 

CFD Trading in the US: FAQs

  • Is Trading CFDs with Bitcoin or Other Cryptocurrencies Illegal in the USA?

    If you are an American citizen, trading any sort of CFD, even if it is a Bitcoin or Cryptocurrency CFD, is banned. This means no regulated company will let you open an account as a trader, but you are still able to trade CFDs with non-regulated companies. 

  • Is CFD Trading Safe?

    CFD assets that are traded with leverage are much riskier than traditional investments. You should always be careful when investing in CFDs as most brokers claim that about 60% to 80% of their clients lose money on CFDs.

  • How Much Can You Make CFD Trading?

    How much money you are able to make trading CFDs widely depends on your initial investment, and it is possible to make a decent living. But beware that the great majority of CFD accounts are reported as unprofitable. 

  • How Do You Calculate CFD Profit?

    To calculate the profit you made from a CFD, you will take the difference between the closing price and your opening price and multiply it by the size of your position. For example, $30.00-$27.50, multiplied by 1000 CFDs for a total profit of $2,500.

Get Started with a Broker

Fees
Average spread EUR/USD standard

Varies

N/A

All-in cost EUR/USD - active

N/A

N/A

Minimum initial deposit

€100

$0

General
Total currency pairs

50

105

Demo account?
Social / copy trading?
Rating
Fees
Average spread EUR/USD standard

N/A

1.6

All-in cost EUR/USD - active

N/A

0.8

Minimum initial deposit

$0

$5-100

General
Total currency pairs

105

57

Demo account?
Social / copy trading?
Rating
Fees

Average spread EUR/USD standard

Varies

N/A

1.6

All-in cost EUR/USD - active

N/A

N/A

0.8

Minimum initial deposit

€100

$0

$5-100

General

Total currency pairs

50

105

57

Demo account?

Social / copy trading?

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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