If you read this page, you are probably interested in CFD trading and seek to know or better understand the costs and benefits you will face when using this type of product. CFD brokers are the link between the market and traders. They differ in the number of available tools, trading conditions and quality of services provided. Before choosing a broker, one should start with his own preferences and pay much attention to security. So, let us get to the bottom of it.
Today the level of competition among companies through which you can trade CFDs is high. Therefore, the difference between them is barely noticeable, and it is more and more difficult to opt for a particular company. However, if you spend a little time testing a company, it becomes clear whether to continue working with it or not.
What Are CFD Brokers? What Services Do They Provide?
Each CFD broker is required to clearly state the trading conditions and margin requirements for operations involving CFDs. This type of trading involves a fairly large number of primary instruments: stocks, indices and commodity futures, Cryptocurrencies or Currency pairs. Because of the growing popularity of the CFD market, brokers are trying to make their trading conditions more profitable in order to attract new customers and at least be different from others.
COMMISSION: A broker will require a commission for each operation that you want to initiate via the platform. In general, this is applied on CFDs equity (and not on indices, currencies and commodities), i.e. a percentage of your investment to which a broker applies a minimum and/or maximum rate. Let us consider three hypotheses that you can meet in brokers’ average fee schedule.
The broker A indicates on its tariff brochure that it applies a commission of 0,10% on the trades carried out on CFD shares. Imagine that you have decided to invest for €9,000 on a CFD share, the commission that you will pay your broker to perform this operation will be 9 euros (€9,000*0.10%).
The broker B, meanwhile, can propose a different tariff brochure and put a ceiling on the amount of a commission. It will indicate, for example, a commission of 0.10% per transaction carried out on CFD shares but with a maximum amount of 6 euros. In this case, your investment of €9,000 should generate a commission of 9 euros (€9,000*0.10%) except that the broker limits the amount to 6 euros. You will have to pay only 6 euros to perform the same trade as in the previous example.
Broker C made the decision to set a minimum threshold for the commission he charges to his clients who trade on CFD shares. Its commission is 0.10% per transaction with a minimum amount of 10 euros. In this case, your investment of € 9,000 should generate a commission of 9 euros (€9,000*0.10%) except that the broker applies a minimum commission of 10 euros. You will have to pay 10 euros to perform the same trade as in the two previous scenarios.
SPREAD: When a stock is listed on the stock exchange, its price is set according to the point of balance between the buyers who wish to acquire one or more shares, and the sellers who agree to relinquish these same actions. Simply put, spread is the distance in the order book between supply and demand on a product. The more buyers and sellers agree on a price the lower the spread, and it grows as the two parties move away.
The interest for you is to find brokers that allow you to trade with the lowest spreads in order to optimize your gains and reduce losses (if you are in the wrong direction) during your trading session.
ADDITIONAL TRADING TOOLS: Major CFD brokers offer additional tools for successful trading, such as:
- Virtual trading (demo) is a simulation trading version offered to new-comers for a trial period via free demo account
- Watchlists (total fields) – this tool allows a trader to total fields while viewing watchlist, including volume, ask, bid, price, symbol, etc.
- Alerts – possibility to install basic price alerts
- Charting for indicators and studies allowing in total from 20 to 140 indicators/studies being inserted in a chart
- Trading directly from chart
- Drawing tools, such as arrow, note, trendline, and pointer are present in chart
- Trailing stop implies that the price level gets constantly adjusted on particular thresholds
- Drawings autosave on any of the charts is available
NEGATIVE BALANCE PROTECTION: Not all CFD brokers can offer their traders such an amazing service as negative balance protection. The reason lies in the fact that they cannot cover all the risks of their customers at a moment’s notice if force majeure happens in the market. Nevertheless, there are quite a few regulated brokers who offer protection against negative balance. A broker who provides negative balance protection is Bernstein Bank, based and regulated in Germany. Therefore, if you have not decided yet which CFD broker you want to trade with, keep it in mind when choosing the most suitable one for yourself. Do not forget to check the conditions offered by a broker. Protection against negative balance shows an important selling point that keeps traders away from the red line. In addition, you should always check every change in the terms of your broker contract, as a new or updated condition may affect the broker’s responsibility for the negative balance protection. Therefore keep also an eye on in which jurisdiction you broker is located. For example, Germany, where a broker like Bernstein Bank is located, is considered as a safe and stable jurisdiction for your deposits and your trades.
CFD BROKERS WITH SEGREGATED ACCOUNTS: CFD trading is a touchy point, like many other forms of investment. Any trader should ensure that his capital is as secure as possible. The whole concept of investing involves a risk element, so it is essential to minimize all other uncertainties. One way to do this is to choose a CFD broker offering segregated accounts. It is worth mentioning, however, that this does not provide a hundred-percent protection of your capital, but this is certainly a step forward. What is the meaning of segregated accounts? When a CFD broker declares that it uses segregated accounts, it means that there is a dedicated account in which customer funds are kept separately from the broker’s operating funds. In the investment industry, a number of brokers prefer to open segregated accounts for their clients, but this can also be a reservation made by a particular regulator.
STRICT REGULATION: All regulated CFD brokers get an approval from serious regulation authorities, such as FCA (the UK) or the toughest regulator in Europe, the Bafin (Germany). Thus, the approval from a Regulation Office is the standard for all operators wishing to obtain a license for a CFD broker. According to regulation requirements, all brokers are required to submit periodic financial statements of their investment holdings and annual audit reports. When you are looking for a regulated CFD broker, you can cross-check the list of regulated brokers to make sure they offer fair deals. Moreover, such authorities are fully responsible for protecting clients from unscrupulous CFD brokers. All regulated brokers are required to comply with the FCA/Bafin guidelines, producing segregated accounts for customer and company funds. For instance, if you want to get a broker license in the UK, your working capital must at least be not less than £1000000, based on the number of traders currently registered on the platform and deposits in the company.