CFDs (Contracts For Difference) allow traders to speculate on the price movements of stocks and shares, indices, currency pairs, commodities and other assets.
For anyone looking to start trading CFDs, there is no shortage of brokers available but choosing the right one is imperative. At TradingForexSites.com our aim is to help you do exactly that by listing and reviewing only the very best CFD brokers from a crowded market. And, for your peace of mind, we only feature brokers that are regulated by a trusted, top-tier authority.
Contracts For Difference (CFD) are becoming more and more popular among retail traders. Fast internet connections and powerful home computers have made accessing financial markets easier for just about anyone. And CFDs allow for a streamlined approach to trading any market you can think of. These contracts are a derivative of the underlying financial market that closely track the price of the targeted asset.
There is a big difference between trading CFDs and forex. With a forex trade, you are physically buying and selling currencies. Your broker places an order with its market maker and the transaction takes place between the two parties.
If you hold a position open overnight you will either, be charged a fee (swap fee), or receive compensation. This is because one currency may have a higher interest rate than the other. Holding the higher interest rate currency means you will have to pay a fee, reflecting the difference between the two interest rates.
With CFDs, you enter a contract with your broker that establishes the FX pair, the quantity of your trade and the direction (buy/sell). However, you have not transferred funds in one currency to receive funds in another, as you would with a forex trade. That said, you may still incur a swap fee for overnight positions even when trading CFDs.
The broker may take the other side of your trade (Market Maker) or transfer your trade (Direct Market Access) directly to a liquidity provider such as a bank. CFDs are particularly useful if you also want to trade stocks, commodities, or indices. Trading these markets often implies hefty fees and large minimum margins to satisfy the trading requirements.
You should consider various aspects of a CFD broker before you make your choice. Some features may be completely subjective; however, several objective features should be contemplated before you make your decision.
You may have been attracted to a CFD broker by a banner on a website or other advertising. However, the first thing you must check is if they are regulated. Before you delve into whether they have everything you are looking for, they must be regulated by a top-tier financial authority.
Regulators keep brokers in check by guaranteeing high standards of transparency, security and integrity. Brokers that are regulated by top-tier authorities are obliged to keep your funds segregated from company funds.
Here is a list of top-tier financial authorities.
The broker under your consideration should be regulated by at least one of these authorities.
As mentioned before market makers quote the prices for their traders themselves. This means they will be your counterparty to the other side of the trade. If you buy a CFD with this type of broker, they will be the selling counterparty.
DMA brokers, or No Dealing Desk (NDD), are connected electronically to a network of liquidity providers. This network provides the broker with the bid and offer prices that are passed on to the trader. Trades are executed electronically without human intervention. Usually, prices are passed on to traders as they are. Market makers will make their own prices and spreads are therefore usually wider than an NDD broker.
For many traders, a full range of FX markets may be all they need. In which case, check they have all the currency pairs that currently interest you or may interest you in the future. If you are going to trade across various asset types check their full list.
Many CFD brokers offer markets in stocks, commodities stock indices and have started offering bonds or options. Also, check the minimum margin requirements, they might be higher for markets such as stocks.
This is how brokers make their money. They can either charge a commission on the trade, usually a specific number of pips per trade. Or they can widen the bid offer spread, this means your commission is implicit in the price. Some brokers charge both, commission and spread, especially when trading stocks or commodities.
Always check their bid offer spreads and commission rates. Higher commissions or bid-offer spreads should be justified by extra features such as in-depth market analysis, trading signals or superlative education.
The choice of trading platform is more of a subjective matter. Traders have their preferences for the layout or sophistication of technical analysis tools. Most brokers offer MetaTrader’s MT4 and MT5 platforms, which have become the retail trading industry standard.
In recent years many brokers have started offering their in-house proprietary platforms. These platforms tend to be easier to navigate, do not usually allow you to add technical analysis of your design, nor do they allow you to set up automated trading.
Most brokers also offer you the possibility of trading directly through a web browser. This may be more useful to some traders than others, but it's worth taking note of. Other third-party trading platforms may also be offered such as ProRealTime or cTrader.
Whichever platform appeals to you the most, it should also have a mobile app for smartphones. With the kind of lifestyle we have, most traders want to be able to check their positions and manage risk while on the go.
This is a standard feature in the industry and all brokers have support at least via email. For a better experience check the broker has an online chat available and support in your language. The bonus in support is with brokers that also offer customer support over the phone. Also, check if coverage is 24 hours 7 days a week instead of the standard 24 hours 5 days a week.
This is an important concept for novice and inexperienced traders. Check the depth and quality of the educational material offered on their website. Top educational material should include videos, live and on-demand webinars, as well as written articles.
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