Best CFD Broker
What are CFDs?
A Contract-for-Difference or CFD can be defined as a contract between two parties (eg. the buyer and the seller of that contract), to exchange the difference in current price of a particular asset and its price at expiration of the contract. In other words, a CFD is a trade contract entered into by a buyer and a seller, for the price difference between the opening and closing price of a trade contract in that asset to be exchanged between both parties. The differences in price are settled via cash payments (as opposed to physical delivery).
The difference between CFDs and futures contracts is as followsrr5r: in futures contracts, there is physical delivery of the asset on contract maturation. For CFDs, there is cash delivery in lieu of the physical delivery of the assets.
CFDs can be traded in both directions: traders can assume long positions if the expectation is that the expiry value will be higher than the value on contract open. In the same way, traders can go short if the expectation is for prices to fall from contract open to contract maturation.
To help you understand CFDs, we have prepared a guide with a list of key factors that can help before you start trading.
- What Assets are Traded as CFDs?
- How Do CFDs Work?
- Types of CFD Brokers
- How to Choose a CFD Broker
- CFD Trading Platforms & Software
- CFD Trading Account Types
- Commissions & Spreads
- Customer Service
- Additional Features
- CFD Contract Specifications
What Assets are Traded as CFDs?
In the financial markets, there are contracts in which the traded assets require physical delivery when the contracts expire. However, these same assets can also be traded in a way that traders can take positions based on the price differentials between the opening and closing price of the contract, without physical delivery of the asset. These are the Contracts-for-Difference (CFD) assets.
All the asset classes that are traded in the financial markets can be traded as CFDs: currencies, commodities, index assets, stocks, etc.
How Do CFDs Work?
The following narrative shows how a CFD trade operates.
A trader with a $50,000 account wants to go short (SELL) on the crude oil CFD at $54.20 He is given a leverage of 1:50 by his brokers. How does he trade this?
The first step is to calculate the margin required for this trade. 1:50 leverage on a Standard Lot trade (worth $100,000) means he has to come up with 100,000/50 = $2,000. This is 4% of his account size. If he goes ahead with the trade, he has two options:
- He may allow the contract to run its full length to expiration (1 – 3 months). If the price of crude is lower, he will calculate the price differential (in pips) and multiply it by a tick value of $10 per pip (Standard Lot) to get the profit. At maturation of the contract, the broker will close the trade automatically.
- He may decide to close the trade manually if the trade has moved into profit. The profit is also calculated as in (a).
Types of CFD Brokers
There are two types of CFD brokers:
- Market makers
- Direct Market Access (DMA) brokers (STP/ECN)
Market makers “make the market”. This means that they buy up large positions from liquidity providers and offer these positions to retail traders, matching selling assets to those traders with buy orders and buying positions off traders who want to sell, all through the dealing desk. This is why market makers are also referred to as counterparties to a trade. Market makers typically accept small account deposits because they have the ability to make up the liquidity deficit. They literally take the other side of the trade to you.
DMA brokers allow the traders to get pricing directly from liquidity providers without intervention from a dealing desk. This is a “direct access” mode of brokerage. DMA brokers do not accept small account deposits since they play no role in bridging liquidity gaps. The traders must have large capital to account for the liquidity required to deal directly with liquidity providers. There are two main types of DMA broker – STP and ECN.
A Straight through processing broker literally passes the trades “straight through” to third party liquidity providers. He acts as a conduit between the two parties.
With an ECN broker, when you open a position on your platform the trade will automatically go through the broker’s computer to an Electronic Communication Network without the involvement of a dealing desk in the middle.
How to Choose a CFD Broker
There are certain considerations that must be made when it comes to selecting a CFD broker. These considerations border on the following points:
- Type of Platform/Trading Software
- Account Types Provided
- Commissions and Spreads
- Customer Service
- Additional Features
These are the considerations that must be made for each metric used in broker selection.
The issue of regulation is very important, and traders should pay attention to this. Regulation of the markets and the participants is essential to maintain investor confidence, provide a level playing field for everyone and ensure that traders always get a fair deal when trading CFDs. Regulators also arbitrate in cases where complaints have been made by the trader against the broker.
Not every webpage that advertises a CFD brokerage service belongs to genuine brokers. Indeed, there have been cases of well-designed webpages which drew in clients, took money from them and disappeared. How does regulation stop these kinds of scams from occurring?
In jurisdictions where regulation of brokers is top notch, there are requirements every broker should fulfil. Some of these are as follows:
- Well-staffed and accessible office. Some regulators will insist on periodic, physical visits to check that there is actually a business premises for the brokerage business, staffed by qualified personnel. In Cyprus for instance, dealers working in CFD brokerages are required to have passed the CySEC I and II Licensing exam for dealers. So not only must there be a physical office, staff in such brokerages must also be licensed and captured in the regulator’s database. This ensures that those who work in such places are traceable and known to the authorities.
- Monthly reporting of activities to the regulators is also a must.
- Maintenance of segregated accounts to separate clients’ funds from that of the CFD brokerage is also mandatory. This protects the funds of traders if the broker experiences bankruptcy.
- The management team of CFD brokerage are to possess certain educational and professional qualifications.
- There are basic infrastructural requirements which must be met by CFD brokers.
- Any reports of infractions are usually investigated thoroughly.
All these serve to protect investors and maintain investor confidence in the CFD market. Some of the worst scams are perpetrated in countries where regulation is weak or totally absent. Many of such scam brokerages use certain incentives to lure their victims to the slaughter house. That is why traders must make sure they only use regulated CFD brokers.
CFD Trading Platforms & Software
There are boatloads of trading software out there. The trader should choose a broker that offers software which they will find easy to use. CFD trading on its own is challenging enough: why make it harder on yourself by using a software you find difficult to handle? There are two main categories of CFD trading platform.
These are developed in house by the brokerage firm or their sister company. This is often built to spec. and usually has a wide level of functionality. These platforms are often well thought out and easy to user with clear user interface. They may not have the deep level of capability of the turnkey/non-proprietary platforms. If you ‘re about to trade with a new platform you have never used, it’s worth opening a demo account to take the platform for a test drive to check that you feel comfortable working with it, and that executes trades speedily.
These are usually developed by a trading technology company eg. CTrader, Metaquotes to offer a one-size fits all solution to traders. The brokers that use this type of platform will white label it, ie. put their branding on it and select the parameters eg. Assets they’d like to set it up with. It so happens that the most popular trading platform on the market is Metaquotes MT4 and now the next generation MT5. If you know that you like to trade with a certain platform, you can find many brokers that offer that particular platform. This gives you a wider choice of the brokers you can work with and also creates a healthy competition among the brokers.
CFD Trading Account Types
CFD brokers will determine what kind of accounts they provide to their traders You will find accounts for beginners, intermediate traders, advanced traders and the high net-worth traders. No two traders are the same. The needs of beginner traders are not the same with those of advanced traders. It is important to choose brokers that understand the individual needs of their clients and assign various account types to take care of the varied characteristics of their client base.
Micro Account – This is the smallest account type available and is useful for beginner traders. Usually you can access this with a very low deposit (from $50-100 and up).
Mini Account – This is a commonly used account and is used by newbies or slightly more experienced traders. You can usually access this account with a minimum deposit of $500.
Standard Account – This is the most popular account which can usually be opened by depositing $1000 and up. With this account you will get access to better trading conditions and a higher leverage.
VIP Account – This is often for institutional traders and can be opened with a $20,000 minimum starting deposit. The trading conditions and leverage on offer is much better than with the other accounts.
Commissions & Spreads
Market makers typically do not charge commissions for CFD trades. They only collect charges on spreads. However, some CFD market makers may collect commissions on certain assets such as crude oil or spot metals. On the other hand, direct market access (DMA) brokers usually collect commissions on both sides of the trade, i.e. for opening and closing a CFD trade.
Spreads on CFD assets are typically higher than assets traded in the currency market. Therefore, the margin required for CFD trades is also higher. Spreads, commissions and leverage will directly impact on the amount of money needed by a trader to participate in the CFD market. It is nota point to be taken lightly.
In effect the customer service or support department is the face of the company. Usually there are a number of ways to get hold of representatives – these include Live chat, email, phone and even fax. Some companies’ even welcome traders to their offices. This is a very good sign as it shows transparency. A good customer service team should be available to handle any enquiries at least 24/5. The markets are open 24 hours throughout the working week and there should always be someone available to help while you are trading. Additionally, good support means a quick response time. A good firm with enough staff will usually respond to your live chat request within one minute and to your email within the hour.
Ideally CFD brokers should have localized telephone numbers, so that no matter what country you are calling from, you will only pay the price of a local call. You would also expect support staff available in every major language of the countries that broker serves.
These cover areas like Market analysis, earnings reports, educational tools, trading tools, signal services and charting software. These tools all help the trader get a trading advantage. Most CFD brokers will now supply a library of resources. At the minimum you would expect frequently updating market analysis and an economic calendar to keep on top of the market news. Find out what additional features the broker is offering that you can take advantage of while trading.
CFD Contract Specifications
What are the contract specifications that traders will encounter when trading CFDs? Put in another way, the question here is: what are those CFD characteristics that traders will encounter when trading?
- Minimum order size: what is the smallest lot size you can trade?
- Leverage: how much leverage is the broker giving you? Many regulators are tightening the noose here and many brokers no longer provide leverage of more than 1:50.
- Commission: How much commission will you pay for entering AND exiting a trade?
- Margin Requirements: How much money will you be required to use in setting up trades?
- Tick increment: What is the minimum change as price moves up or down?
- Tick size: By how many points do prices fluctuate?
- Trading hours: What hours of the day is the parent exchange on which the CFD is listed open for trading?
- Expiration of contract: What is the expiration time of a contract? CFD expirations (barring manual closure) start at 1 month and last for a maximum of 3 months.
- Value of one tick: How much is one tick worth?
In order to select the best CFD Brokers we take into account a wide variety of factors. These include the quality of software available, the trading conditions (eg. spread, leverage), and level of support when you need it. In addition to the ongoing research into the brokerage firms that we conduct, we have also collected information from our readers in the form of user reviews and ratings.
- New Zealand
- South Africa
- South Korea
- Hong Kong
- United Arab Emirates
- Russian Federation
List of Brokers
|BROKER||USER RATING||REGULATED BY||HEADQUARTERS||MIN. DEPOSIT||OFFICIAL SITE|
|ASIC, CySEC, FCA||Israel||$100||Open Account|
|ASIC, BVI, FSA(JP), FSB, MiFID||Ireland||$100||Open Account|
|ASIC, CySEC, FCA||Cyprus||$200||Open Account|
|CySEC, FSB||Cyprus||$100||Open Account|
|BaFin, FCA||United Kingdom||$300||Open Account|