CFDs are complex financial products and involve a high risk of losing capital rapidly, primarily because of leverage. The statistics show that between 75 to 89 percent of retail investors lose their money when trading CFDs without understanding the basics, associated risks, and other important facets of the trade. Accordingly, you need to understand how CFD trading works, role of CFD brokers, and how you can use them to gain returns and avoid big losses.
Type of CFD Brokers
Contract for Difference brokers can be classified into two main types: Direct Market Access or DMA brokers (with further classification of ECN/STP) and Market Makers. Below is a brief description of each:
Market Makers – As name suggests, this type of CFD brokers make the market. They purchase large trade positions from liquidity providers and offer them to retail traders. They match selling assets to those traders with purchase order as well as purchasing positions to those who want to sell, through their platform. For that reason, market maker CFD brokers are also known as counterparties to a CFD trade. They usually accept small cash deposit since they can make up the liquidity shortfall. Market makers are also known for taking the other side of the trade to the traders and make it in their favor.
DMA CFD Brokers – Direct Market Access or DMA brokers allow you to get pricing directly from available liquidity providers with no need of intervention from a specific dealing desk. Since they have no role in filling the liquidity gaps, they avoid accepting small account deposits. Traders willing to work with DMA CFD brokers have to deposit large amount into accounts to get the liquidity needed to deal immediately with liquidity providers. DMA brokers can be further divided into two main types, such as, ECN and STP.
ECN – An ESN Contract for Difference broker allows you to open a position on your platform which will be automatically traded through their computer to an electronic communication network without needing of a dealing desk.
STP – A Straight through processing broker sends the trades straight to third-party providers, acting as a channel between the two parties.
CFD Broker Comparison – What is a Better Option?
Competition in the field of CFD brokers is very strong. Comparing different brokers is important to get the ball rolling on what to consider when it comes to choose the right CFD broker. The primary thing to look out for when comparing CFD brokers is to determine whether you need a Market maker CFD broker or a Direct Market Access type model. The difference between the two will dictate how you can execute your orders into the underlying market and what level of that market transparency you can have access to.
A Market Maker broker trades really closes to the underlying market and can make the market with their own prices. A direct market access CFD provider, on the other hand, allows you to trade directly into the underlying market and avail the benefits of the existing market depth. When comparing CFD brokers it is important to remember that both of them have their own features and pros and cons. It just depends on your requirements and the level of transparency your need.
How to Choose a CFD Broker?
Choosing a CFD broker involves a number of considerations to be made. These include regulation, type of platforms or trading software, account types provided, commissions & spreads, customer service, and other additional features.
- Regulation – This is an important issue which must be considered when selecting a broker. The regulation of the CFD markets and the contributors maintains your confidence, provides a certain level of playing field for traders, and makes sure that you always get a good deal when trading CFDs. Regulation also acts as arbitrates in cases where traders make any complaints against the broker. In addition, there are many other reasons for why you should only work with a regulated CFD broker.
- CFD Trading Platforms and Software – CFD trading comes with a host of trading software programs. Make sure you select a broker who provides you with a software program which is easy to understand and simple to use. Proprietary platforms and non-proprietary platforms are two main types of CFD trading software types which help understand the overall process without a trouble.
- Trading Account Types – Most CFD brokers offer trading accounts for traders based on their expertise level and trading requirements. A good broker understands the individual needs of different clients and allocates various types of trading accounts in order to be careful of the diverse features of their client base. Micro account, mini account, standard account, and VIP trading account are the most common CFD account types that are offered by almost every CFD broker.
- Commission & Spreads- Market makers usually do not charge any commission for CFD trades instead they only collect a set amount on spreads. There are also some market makers who collect commissions on specific assets like spot metals. DMA brokers, on the other hand, typically take commissions at the time of opening and closing of a trade.
- Customer Service – Good CFD brokers have excellent customer service to offer to their customers. They provide a number of representatives, including email, phone, live chat or fax. Choose a CFD broker who offers a customer service with 24/5 to handle any enquiries and has localized telephone numbers.
Some of the best CFD brokers to use in 2019 include XTB, eToro, IG, Plus500, Markets.com, Trading 212, and Capital.com. The best part is that most of CFD brokers offer free demo accounts in order for traders to test them and their platforms without risking real money.
The most critical thing to consider when starting is to determine your trading requirements. You may also like to avail the informative material and free seminars that are being offered by different CFD brokers as this too adds an extra bonus to the overall package. Most of these brokers come up with free training courses and ongoing CFD trading education which is really useful to move ahead safely. You might want to consider using multiple CFD brokers in order to get the benefit of everyone’s resources. This is perhaps the most important reason for many CFD traders are using more than one CFD brokers to get everything they need.