Five Keys To Finding The Best Stock Trading Platform
Regulation – make sure the broker offering the trading platform is authorised by a regulatory regime such as the Financial Conduct Authority in the UK.
History – beware brokers who have suddenly appeared – they could just as suddenly disappear. The most reputable brokers will have a long history of good service.
Choice – a good share trading broker will give clients access to IPOs, to trade on AIM, and to take advantage of penny stocks along with other traditional blue chip stocks
Availability – the best brokers will have a comprehensive portfolio of shares that can be traded including UK and US shares.
Commission and charges – these reflect efficiency, so the better the broker, the lower the charges will tend to be.
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 forecast, 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 examining in more detail how CFDs actually work and how you can trade them.
What is a CFD stock broker?
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:
- Commodities like gold, oil and cococa
- Indices like the FTSE 100, S&P 500 and Dow Jones
- Major currency pairs like the EUR/USD
- Cross currency pairs
- Stocks like Barclays, Lloyds and Vodafone
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 stock brokers 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 instrument 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 account 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 factors 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 sees that with Plus500, clients can sell Barclays at 225.7 and buy at 226.1 That means that Plus500 are currently offering a spread of 0.4. Note that the price must change equal to the spread before the trade will become profitable with a CFD.
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 requirement 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 trusted broker that is regulated by or reputable organisation 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 which 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.
Popular CFD trading platforms
See the list of popular CFD platforms for trading stocks here.