CFD, which stands for Contract For Difference, is a contract or agreement that allows you to trade on the price movement of financial assets such as indices, shares, or cryptocurrencies without actually buying them. Unlike other financial instruments, CFD enables investors and traders to make a profit by speculating on the rising and falling of securities without actually owning the underlying asset. Today, the number of people investing in CFDs has increased, so has that of brokers. This has made the process of choosing a reliable broker very difficult, especially for beginners. But if you are considering investing in CFDs trading, don’t worry. In this article, we have prepared a guide on choosing the best CFD broker to help make a wise choice. But first, let’s look at how these brokers operate.
How CFDs Brokers Operate
CFD is an agreement between two parties: you and your broker. You make a profit by speculating on the price movement of the underlying asset without actually buying the asset, which means you are betting against your broker. This makes your broker the market maker.
The role of your CFDs broker is to set the market prices of the underlying assets. Therefore, when you find an asset you would like to trade such as a share or index, your broker sets it up as a contract or agreement between you and them. When the asset’s price moves in your favor, the broker calculates the differences in prices and credits your account with the returns. Of course, there will be a charge on the trade, which is usually in the form of commission or spread, just like in forex trading.
How to Choose The Best CFDs Broker
Trading CFDs comes with a lot of risks, and that’s why it’s considered an advanced strategy. To succeed in it, it’s vitally important that you select a reputable and trustworthy broker that matches your unique needs. Here some of the factors to consider when choosing a CFDs broker.
1. Regulation
One of the first things to check when choosing a CFD broker is whether they are regulated by a reputable regulatory agency. The reason why choosing a regulated broker is important is because the industry is full of conflicts of interest, which means an unregulated broker can engage in a lot of unethical practices in their favor. By working with a licensed and regulated broker, you have the assurance that it has fulfilled all the operating standards and requirements stipulated by the regulator. These requirements include having enough capital, undergoing regular auditing, and maintaining segregated accounts entirely separate from the company’s own funds to protect clients’ funds. Regulation also offers protection of the clients’ funds in the event the company becomes insolvent as well as ensuring the firm is following the strict rules and standards imposed by the regulation.
Some of the competent regulatory bodies in existence include Australia’s ASIC, the United States’ NFA and CFTC, the UK’s FCA, and CySEC.
2. Charges
Like FX brokers, CFD brokers make a profit by imposing a spread on the market price of the assets. The spread is basically the difference between the ask and the bid price, and it goes directly to the broker’s account. Also, similar to FX brokers, CFD brokers differ in the amount of spread they offer for CFDs. As such, it’s important to determine exactly how much spread your broker applies for each asset.
It’s important to note that spreads aren’t the only commissions imposed in CFDs trading. Other brokers will ask for a certain percentage of all the profits you generate. It’s recommended that you work with such a broker because sometimes spreads may vary a lot from one asset to another. Also, choose a broker that is honest about their charges to avoid engaging in a market you aren’t fully knowledgeable about.
3. No. of Tradable Instruments
Because it’s just an agreement on the price movement, CFDs can be applied to any financial instrument. However, only the best broker will offer a wider variety of tradable financial instruments. For example, for a broker to offer CFDs on US stocks, they must have access to the US exchange so that they can provide an actual market price to their clients. Choose a broker that has access to as many exchanges around the world as possible, so that it will provide you with as many tradable instruments as possible.
Also, before making your broker choice, ensure you know which CFDs they have on their platform. These should include but not limited to US and UK stocks, shares, and indices.
4. Customer Support
No matter your level of experience, it’s important to choose a broker that offers good and reliable support. This ensures that when you face a technical problem or general issue such as incorrect execution, large slippage, or difficulty in depositing, you will be able to quickly solve it.
Good customer support should be available round the clock through various channels such as phone, live chat, and email. It should also be available in a wide range of languages.
5. Competitive Platform Technology
Besides customer service, another important feature to check is the platform. Is it user friendly? Is it easy to navigate? Does it have all the fundamental technical analysis tools you need? A good CFDs platform should also come with customizable add-ons and a diverse selection of trading instruments, including metals, indices stocks, bonds, and cyptocurrencies.
Most brokers today offer demo trading accounts, which allow you to test out the software before opening a real account.
6. Reputation
Lastly, it’s recommended you work with a broker that has been in the business for a long time. Such a broker will likely have a good reputation and extensive experience in the industry. It will also be easy to check their reviews to find out about their quality of service.
To Wrap Up
Trading CFDs can be complicated for beginners due to the wide range of complexities involved in the trading. As such, it’s paramount that you choose a reliable broker with your best interests at heart to make your trading as smooth as possible. Hopefully, the above guide will help you make a wise choice.