CFD TRADING BROKERS

What’s Contract for Differences Trading?

A CFD is a contract executed between two parties, a buyer and a seller, which means that the seller pays the buyer the difference between the current value of an asset and its value when the contract is due. There isn’t any physical exchange of assets (which could be a physical share, currency pair or commodity) between the buyer and the seller, and neither party can claim physical ownership of the asset. CFD trading is illegal in the U.S., although European brokers allow CFD trading in U.S. assets.

Make Decisions and Trade

To trade CFDs, first decide on which underlying asset you want to trade. CFD instruments could be shares, treasuries, currency pairs, commodities and stock indices such as the U.K. 100, which aggregates the price movements of all the stocks listed on the FTSE 100.

Then, open a position and then enter details such as whether you want to buy or sell the CFD, the amount intended for investment, leverage and other considerations.

Leverage is available for a margin account. Leverage refers to a loan extended by a broker, and the securities and cash in your trading account serve as collateral. It allows you to enter into a larger deal than what your account funding permits.

You and the CFD broker then enter into a contractual agreement which covers details such as the opening price for the position, fees involved, etc.

Determine Profit/Loss

If the position closes in a profit, the broker is liable to pay the trader. If it closes in a loss, the brokerage charges the trader the difference. Assume you wish to go long on a CFD based on the shares of XYZ company, currently priced at $400, on the premise that the shares are undervalued and will likely go up. You now need to log into your brokerage account, which provides for CFD trading, and place an order for, say 100 XYZ CFD.

If the value of the shares rises by $10, in line with your expectations, you gain $1,000 (100 x $10). On the other hand, if the value falls by $10, you owe your broker $1,000. Due to the leverage allowed, a trader needs to pay only $4,000 if the margin requirement is 10%. In the first case when you made the right bet. Your profit percent will be $1,000/$4,000 *100 = 25%.

In the second case, your loss percent will be $1,000/$4,000*100, which will be 25%. Meanwhile, if you had chosen to invest in the shares trading in a stock market, your loss percentage would have been 1,000/40,000*100, or 2.5%.

What to Look for in a CFD Broker

As you zero in on the right CFD broker, it’s important to consider a slew of factors, including regulation, costs, tradable asset classes and the trading platforms available.

Regulation

Regulation ensures the safety of your funds from internal company fraud or financial setbacks. Make sure the broker you’re considering is regulated by the regulatory agency of that particular location. For example, in the U.K., the Financial Conduct Authority (FCA) is the regulatory agency and in Australia, it is the Australian Securities Commission (ASC).

Cost of Trading

CFD trading involves costs such as spread, holding costs and commission and possibly more, depending on the broker you choose.

• The spread is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favor before you start to make a profit, or if the price moves against you, a loss.
• At the end of each trading day, positions open in your account may be subject to a charge called a holding cost, and you’ll also pay a separate commission charge when you trade CFDs.

Also, how complicated is it to deposit and withdraw funds? The more funding options your broker offers, the better.

Broad Tradable Asset Classes and Markets

Broad tradable asset classes and markets give you wider choice availability. Some underlying assets you can trade include stocks, indexes, commodities, currencies, cryptocurrencies and ETFs.

Easy-to-Use Platform

Look for a trading platform that offers intuitive trading software, fast execution, good trading tools and order management system. You may lose out on profits if the user interface is poor and navigation is difficult. The platform should be secure and also give you the flexibility to place different types of orders.

Final Thoughts

There’s no one-size-fits-all broker for traders with different experience levels, risk-return and asset class preferences. For starters, regulation could be a key issue, especially because derivative instruments such as CFDs are risky. Because of the volatility involved, a fairly decent trading platform and demo account are invaluable. It pays to do some research before you decide which CFD broker is best for you.