Best CFD Brokers
How did Trading Brokers choose our best CFD brokers?
Following on from our best CFD brokers of 2020, we will now look at what CFDs are and the most important factors to consider when looking for an online CFD broker.
What is a CFD?
CFD means Contract For Difference which is a financial instrument that allows you to trade and try to benefit from the movement in price of commodities (e.g. Gold, silver & oil), indices, stocks (e.g. Facebook, Barclays, Vodafone, Tesla), fx currencies, cryptocurrencies (e.g. Bitcoin, Ripple, Ethereum), ETFs, options, bonds and more. The introduction of CFDs made it possible for online traders to have access to a wide range of markets that were not previously available to them.
When trading CFDs, you do not actually purchase or own the underlying asset, you are speculating on the price movement, up or down. A CFD is a contract to between two parties to pay the difference between the value of the current price and future price
CFD is similar to forex trading in many aspects and are traded through an online brokers trading platform. You simply select the trading instrument that you wish to trade and place your orders. If you believe an instrument will increase in price, you would look to enter a buy (long) position. If you thought the instrument would decline in value then you would look to enter a sell (short) position. The profit or loss is realised depending on the difference between the entry and exit prices when you close the trade. CFDs can be bought or sold at any time that you deem suitable as they do not have an expiry date.
CFDs have become very popular in recent years, especially for day traders. The high leverage and low costs associated with trading CFDs online make them an attractive proposition to retail and institutional traders.
What makes a good CFD broker?
CFD broker regulation
It is vitally important to ensure that you are using a trusted and established online CFD broker. Many online brokers come and go over the years so it is considered a wise idea to use a regulated broker that has been in business for a long time. The most respected regulatory authorities to look for include the Australian Securities and Investment Commission (ASIC), Cyprus Securities and Exchange Commission (CySEC) and the Financial Conduct Authority (FCA). A regulated broker has to conduct business according to strict rules and investors are more protected.
If a broker is listed on an exchange they have to abide by stricter regulations with frequent audits. Furthermore, if the broker is part of a banking group then they must meet specific capital requirements with the upmost transparency.
CFD broker trading instruments
Each online CFD broker will provide a wide range of different instruments, so make sure that the broker you are considering offers the instruments that you wish to trade. If you want to invest in Facebook CFDs or Tesla CFDs, make sure they are offered. It is also worth considering if you will branch out into other markets in the future. If a broker offers multiple markets then it would make the transition in the future more convenient. As there are so many markets to trade, CFD trading hours run 24 hours a day. You will therefore want to make sure your brokers trading hours cover as many of these hours as possible, if not all.
CFD broker trading fees
When trading CFDs online, there are three main fees you need to factor in. This is the spread, commission and overnight holding fee (swap). Not all brokers will charge all fees but it is important to factor these fees into your trading costs. Fees can vary significantly on each broker so it is a good idea to consider them when choosing a suitable broker.
CFD broker spreads
The spread is the difference between the buy and sell (bid/ask) price which can vary depending on the current liquidity and brokers mark-up if applicable. Generally, the more liquidity, the more competitive the spreads will be. Be aware that some brokers use dealing desks and will add a mark-up to the spread to cover operational costs.
CFD broker commissions
The commission is a fee you pay to the broker for each trade that you place. This is the primary way in which brokers make their money. Commission is usually charged as a percentage of the trade or a fixed amount, sometimes a combination of both. The lower the commission fee, the lower your overall trading costs are likely to be.
CFD broker swaps
If you hold a position overnight you will need to pay a swap fee. This is an interest fee for the procedure of moving open positions from one day to another, also known as the rollover. Many CFD traders are day trading so they do not hold positions overnight but if you plan to do so, this is another cost to consider. Some brokers offer swap free Islamic trading accounts which allow Muslims to engage in online trading that conforms with Sharia law
Other CFD broker fees
Some brokers will charge additional fees which are worth considering such as withdrawal and inactivity fees.
CFD broker trading platforms
Each online CFD broker will offer a range of free online trading platforms. You should ensure that they offer a trading platform that you are familiar with. If you have no previous experience using a trading platform, MetaTrader 4 is one of the most popular due to its user friendliness and advanced features. Some brokers provide their very own proprietary platforms such as eToro, Plus500 and AvaTrade. If you plan to trade on the go, then you should check that they offer web and mobile version of your desired trading platform.
Trading platforms can vary in features, some will offer advanced charting tools for detailed market analysis whilst others can incorporate news feeds and other features to assist with your trading. Depending on your individual trading requirements, make sure the platform offers all of the tools you need to trade with efficiency. It could be a good idea to open demo accounts on multiple platforms to compare them and see which you deem more suitable for your own needs.
CFD broker leverage
CFD brokers allow you to trade on leverage which means that you can open a position larger than your account size would allow without it. With an account balance of just $100, you could open a position of $1,000 using 1:10 leverage. Whilst leverage can increase profits, it also increases risk and can lead to large losses. It is of upmost importance that that you have a thorough understanding of what leverage is and the risks involved before you start trading CFDs. Check the broker offers a leverage that you require for your trading strategies.
CFD trade example
If you wanted to trade a stock with an asking price of $20 and buy 100 shares, this would traditionally have cost $2,000 ($20 x 100). With a CFD broker who requires 5% margin, you could open this position with just $100 ($2,000 / 100 * 5). Leverage will vary between brokers and you will need to factor the spread, commission, swap and any other fees into each trade.
Most reputable CFD brokers will offer negative balance protection, which ensures that you will not end up owing your broker more than your initial account balance. They will close out your trades once your margin is used up to prevent further losses.
CFD broker education
Many CFD brokers will provide their own educational materials such as CFD trading guides, webinars and seminars. This can help beginner traders learn more whilst honing their trading skills. Even the more advanced traders can benefit from further education.
CFD broker trading tools
Some CFD brokers will offer clients trading tools that can assist with trading. These tools range from technical chart analysis and economic calendars. If you would like additional tools, see what a broker has to offer and if these come and an extra cost or are free to existing clients.
CFD broker account opening
Each CFD broker will have its own minimum deposit policy so check that you can meet this requirement.
CFD broker account funding
Methods of funding and withdrawing from your online trading account can vary from one CFD broker to another. Check what methods they offer and ensure that it is suitable and convenient for you. Some brokers will offer online payment processors such as PayPal and Skrill which and be processed faster than other methods which can take up to 5 days.
CFD broker customer service
As the CFD market contains so many different instruments and runs 24 hours a day, you will need to ensure that the broker has adequate customer support to answer your questions as and when necessary. Consider the location of the broker and what days/time they offer their support. Ideally, the broker should provide support in multiple languages, at least 24 hours a day and 5 days a week. Check that they have a method of contacting support that is most convenient for you. Online chat can be quick and easy, but some traders may prefer to speak to someone over the phone.
New regulations and measures are constantly being put in place to protect retail CFD traders. European regulators want to clamp down on how CFD brokers conduct their business and how products are offered to clients. Research from European Securities and Markets Authority (ESMA) shows that around 80 to 95% of investors are losing their investment which is not always through fault of their own.
Specifically, when a broker uses a dealing desk there can be a conflict of interest. Instead of executing a trade directly to the liquidity providers, it goes through a dealing desk which can lead to delays (slippage) and spread mark-ups. This makes it even more difficult for retail traders which is another reason why it is so important to choose a reliable broker.
Amongst the new rules introduced in 2018 by ESMA for European traders are:
The maximum amount of leverage offered to European CFD traders has been capped. Some brokers will lift this limit if you meet certain requirements and qualify as a professional trader. To qualify you would usually have needed to have conducted a large amount of transactions, have a significant portfolio and experience in the financial industry.
- 30:1 for major currency pairs
- 20:1 for non-major currency pairs, gold and major stock indices
- 10:1 for commodities other than gold and non-major stock indices;
- 5:1 for single stocks and any underlying not otherwise mentioned
- 2:1 for cryptocurrencies
A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs.
Negative balance protection
Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses.
Restriction on marketing and incentives
Brokers must clearly state the percentage of clients who are losing money and not offer any incentives to attract new clients to trade CFDs.
Best CFD Brokers: CFD Trading Online
How to start trading CFDs online?
Now that you have had a brief overview of what CFDs are, you may be considering opening an online trading account which is a quick and easy process. Simply choose an online CFD broker, follow the account opening process and you will be able to start trading CFDs online through one of their trading platforms.