In this article, we will take a look at few things that are good to know before you select a broker for your CFD trading. The Contract for Difference (CFD) is an over-the-counter (OTC) derivative instrument that can be used to speculate on a variety of assets, e.g. stocks, stock options, commodities, forex, cryptocurrency, and exchange-traded funds (ETFs).
CFDs makes it easy to speculate on price movements without actually buying, owning and selling the asset. You do not need to become the owner of company shares to speculate on the stock price, you do not need to own Bitcoin to speculate on the BTC/USD exchange rate, and so on. With CFDs, it is also easy to speculate on downward moving prices without short-selling.
Among CFD traders, it is common to use leverage to boost trade sizes. This means that you borrow money from your CFD broker to complete a trade.
Most CFD broker belong to one of two categories; they are either market makers (MM brokers) or use the direct market access model (DMA brokers).
A DMA broker will send your buy and sell orders directly to a liquidity pool provided by another company; a so called third-party liquidity provider. If the DMA broker uses an Electronic Communication Network (ECN) for this, they will also be known as an ECN broker. DMA brokers do not cover any liquidity gaps with their own resources. Typically, you need to make a larger deposit to get started using a DMA broker than an MM broker.
The MM broker can cover quite large liquidity gaps with its own resources, because the MM broker will purchase large positions from liquidity providers. The MM broker will still work as a broker and match buyers and sellers, but I can also cover liquidity deficits if necessary. Typically, you do not have to make a large deposit to start using an MM broker.
When comparing different CFD brokers, knowing where they are based, regulated and licensed is important.
When it comes to online brokers, some jurisdictions are more strict than other, especially when it comes to non-professional clients. This can for instance take the shape of banning brokers from offering certain instruments (e.g. binary options) to non-retail traders or severely limit how much leverage a broker is allowed to give a non-professional trader. While some non-professional traders have welcomed this stricter approach, others feel that they – not the government or a licensing body – should be in charge of making their own investment decisions.
A few questions that are good to keep in mind when comparing different jurisdictions and license givers:
The assortment of underlying assets vary a lot between different brokers, so it is important to pick a broker that is suitable for your trading strategy.
A few questions to keep in mind:
If you are employing several different trading strategies based on different underlying assets, your best choice might be to sign-up with the ideal broker for each strategy instead of trying to find a lukewarm comprise. You might for instance need CFD Broker A for your crude oil speculation and CFD Broker B for your BTC/USD speculation.
When picking a broker, make sure the minimum deposit size and the minimum trade size fits your trading plans. Many novice traders want to start out with a small first deposit and make small trades. If this is you, make sure you pick a broker that permits small deposits and small trades. The permitted trade size ought to be small enough for you to carry out sensible risk-management; it is not a good idea to risk a big part of your total bankroll on each individual deal.
When comparing different CFD brokers and trying to get a feel for how they work, it can help to understand how they themselves make the bulk of their money. Different CFD brokers have different approaches, and this will in turn impact terms and conditions for traders. A CFD broker might for instance make a big deal of not charging any commissions or additional fees, but when you look close you realize the spreads are definitely less tight than the average and they are not really offering good terms and conditions for your trading strategy.
Here are a few ways for brokers to make money:
When comparing CFD brokers, try to find out what it would cost you to employ your particular trading strategy with them. It doesn´t matter much if Broker A is offering great terms and conditions for cryptocurrency speculation, when your focus is on equity, and so on.
Also, which transaction method do you want to use and what would it cost to use that particular method for deposits and withdrawals?
The trading platform will have a huge impact on your overall trading experience and an improper platform can also end up costing you money. A platform that is slow or difficult to navigate can delay trades in a situation where every second counts, a platform that freezes up can wreak havoc with your plans, and platform where you keep making small clerical errors when placing orders can cost you $$$$, and so on.
Many CFD brokers have developed their own proprietary platforms, but there are also CFD brokers that will give you access to one or more independent third-party platforms which are used by traders from many different CFD brokers. Notably, some brokers will do both: you get access to their own proprietary platform but also to one or more third-party platforms.
Examples of well-known independent third-party trading platforms:
When it comes to trading on a desktop computer, proprietary platforms are usually designed to open directly in the browser window. (There are exceptions.) Large and well-known third-party platforms are usually available not only for the browser window, but also as a piece of software that you can download and install on your computer.
If you want to be able to trade on a mobile device (smartphone or tablet), it is advisable to pick a platform that is available as a mobile app, which you download and install on your phone. Opening a browser platform in the browser of your mobile device can work, but it can be difficult to use a browser platform intended for a desktop computer on a small touch-screen.
Make sure a downloadable mobile app is available for the operative system of your phone. A mobile trading app developed for Android will not work on an Apple phone and vice versa.
It is important to pick a CFD broker that accepts at least one method for deposits and withdrawals that you are okay with using and that will not cost you an arm and a leg to use for your transactions. Today, many CFD brokers accept a wide range of transaction method types, including credit/debit cards, e-wallets, bank transfers and wire transfers. It has also become increasingly common for CFD brokers to accept deposits and withdrawals of cryptocurrency, e.g. BTC transfers and ETH transfers. Even if your account currency is a traditional currency (e.g. USD or EUR) you might still be able to make deposits and withdrawals in cryptocurrency.
Customer support might seem like a not very important issue when selecting a broker, but when something happens (and it usually does, sooner or later) you will regret picking a broker where the support can only be reached by you making an expensive phone call to Timbuktu during Timbuktu office hours.
Most of the serious CFD brokers will happily give you a free Demo Account filled with play-money and let you use that money to explore the platform or platforms. It is a great way to find out if you like what a particular broker has to offer, learn how the platforms work and test-run your CFD trading strategies.