CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 51% and 89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Regulation
While it may seem obvious, it is imperative that a broker be regulated by an appropriate authority. There are certain commissions that cater for this, but if at all possible, it is always better to go with one that is regulated by a financial authority. Better yet, a broker that is regulated by a national central bank should be reputable in all its dealings.
Spread and Transaction Fees
Your brokerage, whichever one you chose, will charge you in some way or other. This is to be expected. After all, they are offering a service. Many people seek a broker that simply offers the lowest spread, but with money on the line, it is important to consider other factors. For example, while offering a low spread, is the broker then applying higher transaction fees or quarterly charges on your balance? Some brokerages will charge per trade but will offer a flat monthly fee for regular traders. Check all of this before signing up, so that you can find a fee system that you feel will match your trading goals.
Charting Packages and Trade Processing
Most brokerages offer both free and fee-based charting packages. For those of you unfamiliar with charting packages, they graph price action and allow you to action trades. Meta-Trader 4 is among the most popular, as it is free, though other packages, such as Ninjatrader, offer free demo accounts. The majority of other packages charge fees on live accounts, while some will even charge for their demo. MT4 is generally reliable and perfectly acceptable when starting out. It also allows you to program trading software to action trades for you, based on certain market conditions being met. As you progress with your trading career, this feature may prove very useful.
Market Mover
A market mover holds both buy and sell options on an instrument. The instrument is held in inventory by the broker and when you elect to take a position on it, ie buy {go long on your position} or sell {short the position}, the market mover can action it almost immediately. The key is that the broker has direct access to the instrument in question, rather than needing to contact a third-party provider. A broker's ability to action and close trades in a timely manner is important, and generally speaking, market-movers can achieve this. Ensure that the broker you choose is known for processing trades in this manner so that you can enter your position as close to the desired point as possible.
Customer Service
It is important that you have a clear point of contact and timely response in the event of any issue. As with all services delivered online, connection issues can arise and affect your trade. All good brokers have dedicated customer service teams and are contactable in the event you are uncertain about anything. To get an idea of a broker's reputation, it is a good idea to review posts on a few trading forums and look for any repeated issues.
Below are some useful definitions to help you understand what to look for in a stockbroker.
What is a stock CFD?
A stock Contract For Difference (CFD) is a contract between you and the broker in which you take a position on which way a stock’s price will move. If it moves in the direction you have forecasted, you make money whether that movement is up or down.
There are two key differences between this and traditional stock trading. First, you never own the underlying stock. You simply take a view – that you back financially – on what will happen to the stock price. The second difference is that by margin trading, you can use leverage to boost the returns on the position you have taken – but you have to be aware that it will also increase losses to the same extent.
Although there are many advantages to trading with CFDs rather than stocks, there are some disadvantages as well. In this article, we look at both aspects, as well as examine in more detail how CFDs actually work and how you can trade them.
What is a CFD stockbroker?
A CFD firm is a broker who will act as the other party in your CFD position. They usually offer CFDs for a wide range of stocks and other types of financial instruments, for example:
As with ordinary stock trading, CFDs are traded with a spread of prices. This means that if you want to buy a CFD, the price you pay to open (buy) your trade is not the same as the price you pay to close (sell) it.
Unlike traditional stockbrokers who charge a commission each time a client buys and sells a stock, the spread is the cost of dealing in CFDs and you need to take it into account when you are calculating a trade and the potential profit or loss for the trade. Until you have covered the spread, you haven’t made any money.
To trade CFDs, you’ll need to open an account with a CFD broker like Plus500.
CFD platforms for trading stocks
As mentioned earlier, CFD brokers usually offer traders a wide variety of instruments in all the world’s leading markets and many niche markets – the larger platforms like Plus500, offer access to thousands of markets. The brokers will often offer access to a range of trading platforms, usually asking the client to select one of the platforms when they open an account. The platform allows clients to access these markets while they are open, without having to interact with each market separately.
One of the most popular platforms for traders is the MT4 platform. Some brokers like AvaTrade will offer the choice between a fixed spread accounts or a floating spread account, with the floating spread account, the spreads are constantly updated for various financial instruments depending on the market activity. For traders, the size of the spread is a factor that should be considered when choosing a CFD broker.
For example, let’s say a trader believes Barclays shares are going to rise. The trader decides to “go long” Barclays by entering into a contract to buy the shares at a certain price. The trader first visits the website of a broker like Plus500 and checks the spread.
The traders see that with Plus500, clients can sell Barclays at 225.7 and buy at 226.1. The actual spread will vary, and the price must change equal to the spread for the trade to become profitable – or it will result in a loss.
How do you trade stocks as a CFD
Suppose a trader believes that Barclays shares are going to fall and makes the decision to use a Barclays CFD to open a position and try to benefit from a fall in the share price.
The trader would first need to choose a CFD broker, such as AvaTrade. The trader will then need to provide the necessary documents and details before making a deposit to start trading.
Different brokers will have different margin requirements attached to the different CFD instruments and will vary from one stock to another. Traders can expect to get a margin of anywhere up to 20:1 for CFD stocks.
This means that for every pound a trader has deposited, they can take out a contract to buy or sell £20.00 of stock (20 times the amount of their deposit). This is one of the main reasons that CFDs are popular amongst traders – CFD brokers give traders the ability to trade more than their initial account size by using leverage.
However, be aware that if the stock price moves very strongly in the opposite direction to the one for which you have a contract, you can find yourself owing more to the broker than you have deposited in your account unless the broker offers negative balance protection.
So the cost of your trade will include the spread, and other fees if any like overnight financing, generally there will be no commission for a CFD broker.
Five Advantages of CFD brokers vs. traditional brokers
- A broker such as AvaTrade allows you to trade on margin – so you need far less capital to take a substantial position on a stock.
- Profits are amplified by using leverage – but note that losses are too
- Traders can access global markets from one trading platform, with very fast execution
- Commission and fees are not usually charged
- Day traders have access to tools such as charting and graphing
Five disadvantages of CFD brokers vs. traditional brokers
- Margin trading means that your deposit – and more – can be rapidly wiped out
- It’s a case of buyer beware – be sure that you are using a trusted broker that is regulated by or reputable organization like
- In both cases, traders pay every time you buy and sell
- If there is little volatility in the market, you may not make much money
- It can be tempting to overtrade
The difference between trading and investing
Investors tend to take a longer-term view of a share’s performance and are not particularly interested in short-term volatility. They hold the underlying stock and are therefore interested in dividends as well as share price appreciation.
Traders seek to deploy strategies that will allow them to take advantage of market volatility and share trends. They don’t own the underlying assets and hold positions for a much shorter period.
In short, investors are looking for a payout in the future and traders are looking for a payout in a much shorter time frame, for example, scalpers are looking to make a profit within minutes of placing a trade.
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At BrokerNotes.co, our data-driven online broker reviews are based on our extensive testing of brokers, platforms, products, technologies, and third-party trading tools. Our product testing extends to the quality and availability of educational content, market research resources, and the accessibility and capabilities of mobile platforms and trading apps. We also dive into each broker’s trading costs, such as VIP rebates, inactivity fees, custody fees, bid/ask spreads, and other fee-based data points.
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Note: The online brokers on our site provide the ability to trade forex in one or more ways, such as non-deliverable spot forex (i.e., rolling spot contracts), contracts for difference (CFD), or other derivatives such as futures. The availability of specific markets or features will depend on your country of residence and the broker's applicable brand or entity that services your account(s).
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