A Contract for Difference (CFD) is a contract between two parties. One party will agree to pay the other the difference between the current value of an underlying asset and its value at contract time. CFDs are traded on margin, so traders are only required to put down a small fraction of the total trade amount when opening a position.
Traders need to carefully choose their preferred trading platform and their preferred CFD provider. This article goes over ten things that users should look for to make informed decisions about which provider they wish to use.
1. Exchange regulations
It is essential that you know whether or not your chosen CFD service’s company is regulated. It will tell you how trustworthy the company is, what kind of information they are obliged to reveal to their clients and ensure that your money is safe with them if something goes wrong. European providers are more closely monitored by government organizations as a rule of thumb, while companies that trade in the US only have to comply with jurisdiction-specific regulations.
2. Account type
CFDs work on an exchange, usually via an “ECN” account or a “retail trader” account. The former has less restrictive terms regarding minimum deposits, margin requirements etc. – but also limits your choice of underlying assets significantly. A retail trader account offers more products, but entry barriers can be much higher.
Choosing a service that provides you with multiple ways of accessing your account is essential. For example, some accounts only offer web-based access, while others provide mobile apps for Android and iOS devices.
The commission fee is an unavoidable part of trading, but it doesn’t mean that you have to accept any price the provider quotes you without question. A good CFD provider will offer competitive rates ranging from around 5-15 pips on major currency pairs (e.g. EUR/USD). Many companies offer zero commission trading for accounts with high monthly trading volumes.
CFD providers typically offer anywhere between 1-500x leverage on major currency pairs. Generally speaking, the higher your leverage is, the easier it is to lose money – especially when using relatively small amounts of capital. While finding a low leverage option may seem like an advantage, you should also be aware that most companies have a policy of automatically increasing your leverage after you’ve been trading for a while if your balance exceeds a certain threshold.
6. Minimum deposit
A minimum deposit is required to open an account with a given CFD provider. It’s important to understand that while some companies offer mini-accounts with relatively low minimum deposits, others won’t accept traders unless they can deposit at least 3,000 EUR or more.
7. Minimum withdrawal
It may seem obvious, but you should always ensure that the withdrawal processes are straightforward and uncomplicated before choosing a provider – especially if you’re new to CFDs. You will not be able to close your position unless you have enough funds in your account for both the purchase and the commission fee.
To invest smartly in CFDs, you must understand what makes a good trading strategy. In this regard, your chosen company should offer plenty of educational material on its website for free – ideally with 1-on-1 feedback from experienced brokers who can provide personal tutoring sessions if needed.
9. Range of markets
While most providers offer CFDs on major currency pairs and some popular indices such as CFDs on metals, the S&P 500 or Dow Jones Industrial Average – not all companies have a wide range of assets available for trading. It is essential to determine whether there are any restrictions whatsoever before deciding which product would suit you best.
10. Number of clients
The more clients a company has, the more likely they’re doing something right! A good indication of a respected CFD provider is one with a wide range of satisfied traders. It’s generally backed up by increasing trading volumes over time and a growing customer base.