Canada's Best CFD Brokers for 2024

Contracts for Difference (CFDs) were created in the UK in the 1970s in order to leverage trades on gold before becoming a widely traded derivative in the 1990s. In the late 1990s, CFDs became tradable for retail clients in the UK and then grew exponentially with technological advancements through the early 2000s. CFDs have now become widely adopted due to the possibility to trade nearly any underlying asset with leverage.

But what are CFDs? What is a CFD broker and how do CFD brokers work?

This article covers everything you need to know about CFDs, CFD trading and CFD brokers in Canada.

What is the best CFD Broker in Canada?

The best CFD broker in Canada will vary depending on the person you ask, the experience of the investor and the analytical tools they need. However, all the top CFD brokers should be able to provide users with advanced trading platforms and mobile apps, analytical tools as well as a competitive fee structure.

Considering these factors, two of the best CFD brokers in Canada include are Questrade and XTB. Let's look at each.

Questrade: the best Canadian CFD Broker

Questrade is one of the biggest independent CFD brokers in Canada. It operate its own cutting-edge trading platforms and offer some of the lowest broker fees when compared to their competitors. As an 11-time winner of Canada’s Best Managed Company award and with over $30 billion in assets under management, Questrade remains one of the best CFD brokers for Canadians.

XTB: the reliable and global CFD broker

XTB is one of the largest and best known CFD brokers in the world. It offers arguably the best customer service in the industry along with a top tier xStation 5 trading platform that comes with a range of analytical tools and features.

In addition to excellent services, it also offers a wide variety of tradable CFDs that include equities, ETFs, commodities, forex, indices and cryptocurrency. Whether you are a beginner or an experienced CFD trader, XTB will impress as your CFD broker.

What are CFDs?

A Contract for Difference, also known as a CFD, is a derivative trading product where a trader (buyer) and a broker (seller) enter into an agreement and speculate on the price movement of an underlying asset. The value of the investment and any profit or loss comes from the difference in the price movement between when the trade was opened and when it was closed.

Since the CFD is merely a contract on an asset as opposed to an asset itself, the CFD allows investors to speculate on the price movement of nearly any security without actually owning the underlying asset. Due to this possibility, the investor can also utilize leverage when trading to try and increase profits.

What is CFD trading?

CFD trading is the process of speculating on and investing in the price movements of securities without owning the underlying asset. CFD traders, known as buyers, will enter into a contract with CFD brokers, known as sellers. If the buyer believes that the value of an asset will increase they will enter into a buy contract with the seller. If the value does increase, then the buyer can close, or sell, the contract and the seller will settle the difference in cash. Similarly, if a trader believes the price of an asset will fall, they can enter into a CFD investment speculating on the decreased value of an asset. This is known as short selling.

Since CFD trading does not involve owning the underlying asset, CFD brokers can allow investors to trade with leverage. This means that CFD traders can enter into contracts with more money than they have access to by borrowing the difference from the broker. The leveraged CFD trade can either significantly multiply the profits or losses of any given investment.

What is a CFD broker?

A CFD broker is a financial intermediary that specifically offers clients access to contracts for difference (CFDs) on financial markets. Brokers use various trading platforms to provide the ability to trade CFDs and the CFD trading platform can also include analytical tools such as charts and news to help traders make informed decisions.

The CFD broker usually defines the terms and conditions of the contract for differences based on the underlying asset to be traded. Due to the ever-increasing popularity of CFD trading, CFD brokers have to develop more streamlined and advantageous contracts for investors in order to attract more clients.

Types of CFD brokers

As a brokerage and financial intermediary, CFD brokers can be divided into two specific categories. These are Direct Market Access (DMA) brokers and Market Makers. DMA brokers are often the preferred CFD brokers because they allow investors to trade directly with exchanges. However, due to the risks and complexities involved with live market access, DMA brokers should only be considered by advanced traders.

• Direct Market Access brokers: DMA brokers provide investors with the ability to place trades directly with online exchanges. The direct access allows traders to see live CFD prices and volumes of the underlying asset being traded which leads to greater visibility of the market. In addition, since investors have direct access to markets, all their trades are executed in real-time.
• Market Maker brokers: Contrary to DMA brokers, market maker brokers do not provide clients with direct access to exchanges. Instead, market maker brokers offer their own CFDs on pre-determined underlying assets which they have already purchased from liquidity providers. While the prices offered by market maker CFD brokers are not real-time, they do still reflect the actual price of the underlying asset.

How do CFD brokers work?

CFD brokers work by offering clients access to derivative contracts which not only allow them to invest directly in assets but also allow them to speculate on the price movement of the underlying asset. By providing access to derivative contracts, CFD brokers give traders the ability to invest with leverage and in assets that they may not otherwise have access to.

CFD brokers also provide traders with a trading platform from which they can access exchange markets and invest in CFDs. CFD brokerages will provide different types of trading platforms that offer different perks. These can relate to analytical tools, fee structures, customer service and trading guides so it is important to investigate how CFD brokers work before diving in.

Wondering how CFD brokers make money? CFD brokers usually make money by charging commissions on investments placed or through spreads on trades. It is likely that a CFD broker will also charge other fees such as account fees, inactivity fees, or financing fees. Due to these costs, it is important that you understand the various costs and compare the best CFD brokers before opening a trading account.

Is CFD trading legal in Canada?

Yes, CFD trading is legal in Canada.

While CFD trading is legal in Canada, CFD brokers headquartered in Canada and those providing trading facilities to Canadians have to comply with Canadian regulations. These trading regulations are determined and enforced by the Investment Industry Regulatory Organization of Canada (IIROC) which operates under provincial and territorial securities commissions.

CFD brokers that are regulated by IIROC are also often members of the Canadian Investor Protection Fund (CIFP), which ensures members' accounts, cash and securities in the event of a financial intermediary going insolvent.

How is CFD trading taxed in Canada?

CFD trading is taxed in Canada at a varying rate depending on whether the CFD is a short-term trade or if a CFD position is open for the long-term. Short-term CFD trades are considered business income and are 100% taxable at the marginal rate, whereas any profits made on long-term CFD trades will likely be viewed as capital gains and taxed at 50%.

While short-term CFD trades are 100% taxable as business income, they come with the added benefit of capital losses being able to offset against other income or gains. In addition, you would be able to claim specific expenses against the trading activity as it is classified as a business income.

Can I lose money with CFD trading?

Yes, you can lose money when CFD trading. CFD trading is just like any other investment where there is a risk that your open position, or investment, does not make you a profit. However, unlike a normal investment, your CFD position could lose you more money than expected if you are trading with leverage.

A leveraged CFD trade multiplies both your earnings and losses and when the losses start to grow a negative leveraged position may be liquidated due to a lack of funds. Leverage should, therefore, only be used by experienced traders.

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Patrik Shore Ex: Financial Crime Investigator

Patrik Shore has nearly a decade worth of experience in the financial industry and has been writing for HelloSafe over the past year. Having started his career investigating financial crime to moving on to financial planning, Patrik has a deep understanding of all things personal finance.