CFD Brokers

CFD Brokers 2017

CFD stands for Contract-for-Difference. A CFD is an agreement between the buyer and seller of an asset to exchange the difference in the current value of a stock, commodity, currency or index and its value at the end of the contract. If the difference is positive, the seller pays the buyer. If it is negative, the buyer will have to pay the seller and ends up losing money.

Our Top 5 CFD Brokers in 2017:

Take a look below for our recommended CFD companies this year. We take into account a range of criteria when publishing our reviews.

Broker Min Account Size Leverage Spread US Traders Review Open Account
eToro $200 30:1 from 2 pips ReviewVisit BrokerDemo
AvaTrade 400:1 3 Pips ReviewVisit BrokerDemo
CMSTrader $250 1:400 1 pip ReviewVisit BrokerDemo
London Capital Group 500:1 1 pip ReviewVisit BrokerDemo
Trader's Way $100 USA Allowed ReviewVisit BrokerDemo

Disclaimer: Your capital is at risk when using the above platforms

What are CFDs?

CFDs are leveraged derivative products and are traded on margin. So they not only allow investors to speculate on price movements without the need to own the underlying asset, but they also allow traders to control larger positions with smaller amounts of money. The profit/loss in a CFD trade is determined by the difference between the buy and the sell price.

Unlike conventional spot forex trading, CFD trading also allows owners of stock CFDs to receive cash dividends. CFDs are by nature only suited for short term speculation and long-term position trading.

CFD trading is performed via brokerage accounts designated for this purpose. These brokers charge a commission for each trade on opening and closing a transaction. Some others will add these commissions to the prices of the trade (i.e. add them to the spread), while there are others that will do both.what-is-cfd-trading

A CFD brokerage account enables a trader to participate on the short term in trading assets without the need to own those assets, especially if trading on those assets require a large amount of money to control positions. For instance, trading a stock index or a crude oil contract will require large amounts of money if traded on a conventional exchange, but trading these assets as CFDs in the form of spread bets will allow the trader to enjoy a lower level of financial commitment while gaining as if the entire contract was traded on the conventional exchange.

Types of CFD Brokers

Just like is obtainable in the forex market, CFD providers can be divided into two classes:

  1. Market makers
  2. Direct market access (DMA) providers

Some providers provide both models of brokerage in CFD trading (e.g. IG Markets), while some are either exclusively market makers or are exclusive DMA providers. Each one comes with its merits and demerits, and it is up to the trader to decide which model will work best for their business.

Market makers operate traditional spread bets where the trader must trade against the CFD provider, and on their displayed prices. Commissions and capital requirements are lower, but issues of conflict of interest will come up here.

With DMA providers, your CFD orders are sent directly to the order book. A trader may send a limit order to either buy on the bid price or sell at the ask so as to avoid paying the spread if another party hits the bid or offer price that the trader has set. DMA providers typically charge higher commissions.

CFD providers will also come with different features, irrespective of which model of operation they offer. There are differences in commission rates offered, assets traded or markets traders can participate in. It is difficult to get all the desired features in one single CFD offering and so traders may find it more rewarding to maintain accounts with several brokers so as to get a proper mix of desired features.

Choosing a CFD Broker

When choosing a CFD broker, there are certain points that the trader has to consider:

  1. Regulation: Is the CFD provided licensed to offer this service in the country of domicile? Furthermore, are there specific conditions which this broker must fulfill in terms of the way clients’ monies are handled?
  2. Margin: CFD accounts are basically margin accounts. It is good to know the margin levels and the margin rules.
  3. Commission charges: Commissions are charged on CFD trades. What are the commission charges that will accrue to the account? Remember that some CFD brokers will also build charges into the spread. You need to know what you will be paying to trade on a CFD platform.
  4. Trading Platforms: In Australia, it is also possible to trade CFDs on exchanges. Would you do exchange-traded CFDs or platform-based CFDs? If you are using an online platfrorm, ensure the platform is reliable and offers a good charting software for technical analysis.
  5. Assets/markets offered for trading: Some countries will limit what can be traded as CFDs. You need to know if your preferred market/asset is to be traded on a particular platform.
  6. Market Maker or Direct Market Access? This is a big question. Market makers offer lower entry in terms of capital requirements, charge lower interests, but will in essence be trading against you. The DMA providers will forward your orders to the order book, but will charge higher commissions and demand larger capital to trade. Which can you afford, and which do you prefer if you have a choice?
  7. Access to domestic markets and international markets: Some CFD brokers only offer domestic assets for trading. Others will give you a mixture of domestic and international assets. There are merits to each route. If you are based in the same country as the broker, you will be better served trading domestic assets. I know more about company stocks listed in my country than those traded in another country. For me, domestic assets may be the way to go. But if another trader is working elsewhere as an expatriate, he may like to get a mix of domestic and international assets so as to get a blend of both worlds.
  8. Trading Charts and Research Resources: Charts and research resources are key in conducting analysis for trades. Make sure the broker you choose will offer these.
  9. Risk Management Tools such as Guaranteed stop loss orders: The ability to manage risk is one tool which safeguards your success in the markets. Risk management tools such as guaranteed stops are a way of controlling losses when the market is in a volatile mood. This way, slippage will not dent your account. There are situations when excessive market slippage can literally pull the bottom off the bucket. Guaranteed stop losses will prevent this from happening to your accounts.

So when choosing a CFD broker, take these points into consideration and choose carefully. It is not about choosing a “good” CFD broker. It is about choosing the broker which best suits you.

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