Returns from trading
The exact amount of profit a trader will be set to make will depend on the strategy they use, their risk management practices and the amount of capital they put down in the first place.
When you trade using leverage, any profits made would be magnified. You would only need to put down an initial deposit to gain full market exposure. Any subsequent profit (or loss) is then calculated using the full value of the trade, not this initial payment.
Trading can be potentially lucrative, but it is also risky – this makes it important to learn about the risks associated with trading.
While investors might seek to generate annual returns of 10%, traders will be looking to generate the same average return each month. These profits are made by being proactive in a short timeframe through the frequent buying and selling of assets – taking advantage of both rising and falling markets.
In contrast to buying and holding assets as investments, there is no dividend yield from a CFD position. Instead, positions are adjusted to reflect the change in the underlying market.
Cost of trading
As with investing, there will be some additional charges associated with each trade. In most cases this fee is in the form of a spread, which we charge on top of the market price. The spread is the difference between the bid and ask prices and can vary depending on market conditions.
Spread charges apply to CFD trades for all markets except shares. For every shares CFD trade, you’ll pay a commission instead of a spread.
Learn more about the costs and charges of trading
Other potential charges include overnight funding fees, guaranteed stop premiums and any extra services you choose to use, such as direct market access, advanced charting packages and data streaming.
It’s also important to be aware of the maintenance margin, which is the term for the additional funds that might be required if your open position starts to incur losses that are not covered by the initial deposit. If this happens, you could get a notification from your provider – known as a margin call – asking you to top up the funds in your account. Failure to do so can result in your position being closed and the loss to your account being realised.
Taxes for trading and benefits
When you trade, the tax your position is subjected to will depend on whether you are using CFDs.
- CFDs have no pay stamp duty and any losses can be offset against profits for CGT liabilities – making them a useful instrument for hedging
Like investments, taxation rates will depend on the country where the company is listed – tax laws may differ in jurisdictions other than the UK. Tax laws are subject to change and depend on individual circumstances.
Risks of trading
CFDs come with a unique set of risks as they are leveraged products. While leverage can magnify profits, as we’ve seen, it can also magnify your losses. To help restrict your potential losses from trading, there are a variety of ways that you can manage your risk with IG.
The most common are stops and limits. Stops automatically close your position when the market moves against you by a specified amount. You can choose from three types of stop:
- Basic. Closes you out as near as possible to the price level you choose. A basic stop may be affected by ‘gapping’ overnight or in times of high volatility
- Guaranteed. Closes you out at the level you requested, regardless of whether the market gaps. This will incur a small premium, but only if the stop is triggered
- Trailing. Moves with your position when the market moves in your favour, but locks in as soon as the market starts to move against you
Limits, meanwhile, do the opposite, closing your position when the market moves a specified distance in your favour. Limits are a great way to secure profits in volatile markets.
You can learn more about financial markets and managing your trading risk with IG Academy’s series of online courses.
Styles of trading
A trading style is a set of preferences that determine how often you’ll place a trade and how long you will keep those trades open for. It will be based on your account size, how much time you can dedicate to trading, your personality and your risk tolerance.
There are four main trading styles:
- Day trading. As the name suggests, this style involves opening and closing positions within a single day – this is so that there are no risks or charges associated with holding positions overnight
- Scalp trading. This style involves opening and holding a position for a very short amount of time, from a few seconds to a few minutes at most. The aim is to take small but frequent profits
- Swing trading. The aim of this style is to focus on the body of a larger move, rather than identifying the start and finish of a trend. Positions are held from days to weeks
- Position trading. This style is the most similar to investing, as it involves holding positions for a longer period of time, depending on the overarching market trend. This could be months to years
Learn more about trading styles and strategies
Start trading
To start trading, you should:
- Create a live account
- Choose an asset to trade
- Open your first position
If you don’t feel ready to trade on live markets, you can always open an IG demo account to practise trading in a risk free environment.
Footnotes
1Place 10+ trades on UK shares in the previous month to qualify for a £5 commission rate. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
2Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
3Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK. Amounts drawn from your SIPP at retirement are subject to income tax at prevailing rates. You may be able to carry forward unused allowances from previous tax years. Please consult your financial advisor.
4Negative balance protection applies to trading-related debt only, and is not available to professional traders.
5To trade with Forex DMA, you’ll need to qualify for an IG professional account.
