A contract for difference, also known as a CFD, is an agreement between two parties to exchange the value of a share, currency, or any other financial instrument at a specified price.
If you are looking for a provider who offers CFDs, there are many considerations to consider before signing on the dotted line.
1. Leverage given
The first thing you need to look out for is how much leverage they give their customers. This is expressed through margin calls and how soon they come around (days). For example, with 20:1 leverage, your losses can go up to 5% of your total deposit, but if 100:1 leverage were used, then the maximum loss would be 50%. So it’s important that when choosing your broker, you know how much money you’re willing to risk and choose a broker that provides the right amount of leverage for your deposit.
2. Special offers
Secondly, look out for their special offers. Like any company that wants attention or more business, some CFD brokers may give extra incentives to new customers, such as free trading software. This should be weighed against the current price, which includes this ‘bonus’ and if it’s good enough to make up for the spread (the difference between the buy and sell prices). The types of bonuses they offer could be cashback on transaction fees (for placing specific trades), free training online, no commissions paid on winning positions, etc.
3. Type of trading platform offered
Thirdly, think about what type of trading platform you want to use. Some brokers offer non-trading platforms, which are mainly for analysis of the markets. However, most brokers provide their trading software; this allows you to see all of your open positions and how much you’ve made/lost throughout the day (in real-time). Most trading software will allow you to set up specific orders (to automatically buy or sell) as well as execute trades if something looks like it’s about to move up or down at specific prices.
4. Market coverage
The fourth thing worth considering is what type of market coverage they offer; because CFDs are traded over-the-counter (OTC), there is no guarantee that your broker has access to both sides of the trade. If you are trading an illiquid market, the bid/offer spread will be vast. Research into the liquidity of the products you are interested in is vital to avoid any nasty surprises when opening a position.
5. Customer service levels
Another factor worth bearing in mind is their customer service. Look out for brokers who are available 24/7 with professional customer care representatives who have sufficient knowledge of all products offered by the company, so they can guide you through your trades without taking too much of your valuable time.
6. Are they established?
You should also look at how long the broker has been established. It’s always good to do some background checking before committing yourself to anyone, especially since most new CFD companies offer low prices as incentives for signing up with them (these types of companies are known as bucket shops).
7. Do they offer suitable account types?
Look out for what type of account you need to open. Many brokers will require a minimum deposit (e.g. $10,000), so you must have this amount set aside before opening your account. Also, some brokers are looking for professional traders, while others are aimed at beginners/amateurs who want to dabble in the markets without taking too much risk.
8. Fees and commissions
Consider also the charges involved when trading CFDs. This includes commissions and spreads on each trade which can differ significantly from broker-to-broker because they use different pricing models based on how they make their money (from commissions or spreads). So follow the same rule many financial institutions abide by; never pay for something you don’t need.
Hopefully, if you stick to these points, this will make your decision easier when choosing which company to trade with. As always, make sure you read the fine print before signing any agreement to trade with an online broker.