Many investors would love to trade CFDs but have difficulty finding a good broker for their needs. For instance, traders with a basic understanding of CFDs still need a good broker with educational materials to help them learn more about trading CFDs. They also need to know that the CFD broker is safer, and that opening a CFD account is straightforward.
Thankfully, these traders don’t have to worry anymore. We have taken our time to find CFD platforms that are safer to trade with and also have reasonable fees. In this guide, we will go through everything about CFD trading, factors of a good CFD broker, how to open an account with a CFD broker and the important requirements you must meet before opening the account.
At the end of this guide, we will look at some opinions from traders on Reddit and Quora to see who they think is the best CFD broker around. There is also a ‘Frequently Asked Questions’ (FAQs) section at the end of the guide.
What are CFDs?
CFDs stand for “Contracts for Difference”, and they allow you to trade on the price movements of financial instruments like stocks, cryptocurrencies, commodities, indices and currencies. With CFDs, you can speculate if the value of an asset will go up or down and trade on that movement without buying the real asset. If you make the right speculation, you will make profit. However, if your prediction is wrong, you will make a loss.
CFDs were created in the 1970s, but only for institutional investors to leverage their market position. Institutional investors are companies or corporations that invest on behalf of other people. Examples are hedge funds or mutual funds. Later on (in the 1990s), CFDs were made available for retail investors to trade with. Today, many retail traders trade CFDs worldwide, and many of them are attracted to the potential benefits of the right speculations.
It is active for the contract duration as agreed by the investor/trader and a CFD broker. Basically, the investor chooses to speculate on an asset he/she thinks will rise or fall based on research. For example, a trader can purchase a stock CFD he/she believes will rise in value. By doing this, the trader doesn’t have to purchase the whole stock but just a fraction of the stock’s price, which is known as margin. The amount of money the trader pays for the stock CFD will depend on the company’s margin rate. For instance, let’s say the stock price is $20 and the company’s margin rate is 10%, this means the trader can open one standard position that is worth $2 and can open up to 50 standard positions with a $100 account balance. This is known as the leverage effect and is the main reason people prefer trading CFDs because it gives them the exposure they normally wouldn’t have.
What are the Assets Traded as CFDs?
There are many underlying assets you could trade as CFDs. These assets are often called trading instruments or securities. Let us look at some of them:
Every day, investors trade currencies on the forex market. There is a wide range of currency pairs available for trading, but the most traded ones are EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CAD, etc. Most brokers offer 40 or more currency pairs to investors on their platforms. These currency pairs are being traded in pips, which is a unit of measurement for price change.
Also, investors who trade forex often do it with leverage, which means they borrow money to increase their exposure in the market. Leverages are often represented in ratios, like 1:20, 1:50, etc. CFDs are traded with leverage as it gives you more exposure in the forex market, which won’t be normally possible with your capital as a retail trader/investor.
Commodities are financial contracts that represent the value of actual goods, like soybean, gold, silver, meat, natural gas, oil, etc. Sometimes, buying these goods locally could be difficult as you could be restricted by access or storage space. CFDs make it possible for you to trade these items without storing them physically. By trading commodities CFDs, you speculate on the direction of the price of the commodities and make a profit or loss depending on how the market goes eventually.
Stocks are probably the most common securities in the financial market. A stock represents a part of a company, so buying a stock makes you a part owner of the company. Stocks are also known as shares. You can buy as many shares as are available in the market. People often buy shares because they believe the company’s value will increase in the long term and they’ll make a profit from the difference. Other people buy shares because they expect dividends from the companies they buy shares from. There are also people who rely on the volatility of the stock market, so they buy shares and sell them quickly when there is a price increase.
If you choose to trade on the volatility of the stock market, you can use CFDs. With stock CFDs, you can trade the price movement of stocks, whether up or down, and make profit when you speculate correctly. You enjoy leverage to trade stocks’ prices without actually owning any shares.
Indices are used to measure the performance of a group of shares from a particular exchange. For example, the S&P 500 measures the performance of stock prices of the top 500 companies in United States stock exchanges, while FTSE 100 tracks the top 100 companies in the London Stock Exchange. By trading indices, you gain access to trade on the entire sectors and economies at once, with only one open position.
You can trade indices using Index CFDs. With index CFDs, you don’t have to own the stocks in the CFD to trade them.
ETF is an abbreviation for Exchange Traded Fund. Just like indices, ETFs are used to measure the performance of a group of investments and securities, like bonds, stocks or indices. They often track the performance of markets or a group of markets. ETFs are traded on financial markets, the same way stocks are traded. You can use ETF CFDs to trade ETFs without owning actual ETFs.
Cryptocurrencies are digital currencies without any centralised government control. In other words, it is a decentralised digital currency. Investors trade cryptocurrencies in the crypto market the same way currencies are traded in the forex market. Many brokers allow trading of cryptocurrencies with CFDs. However, due to the volatile nature of cryptocurrencies, most regulatory bodies limit the amount of leverage CFD trading brokers can offer to trade crypto CFDs.
What are CFD Brokers, and How Do They Work?
CFD brokers are companies that offer leverage trading of different trading instruments. They are regular brokers that allow you to trade the CFDs of currencies, cryptocurrencies, ETFs, stocks, commodities, etc.
A CFD broker is a very important agent in the financial market. This is because they allow retail traders to get more exposure to different financial markets. Originally, it would be expensive for retail traders to gain this amount of exposure, and only institutional traders would have access to these markets. Now, thanks to the leverage offered by CFD trading brokers, retail traders can now access these markets without requiring large amounts of funds.
To understand how these types of brokers work, it’s important to know the different types of CFD brokers around.
Types of CFD Brokers
There are two major types: Direct Market Access (DMA) and Market Makers brokers. Let’s go through each one:
Direct Market Access (DMA) CFD Brokers
Direct Market Access brokers offer you 100% access to the market through their brokerage. This means they don’t affect pricing in any way. They offer you the market price directly. DMA CFD trading brokers are nothing more than middlemen, offering you access to the market for some commission in return. The prices you pay to trade your CFDs are a direct result of the market prices.
Market Makers CFD Brokers
Market Makers, on the other hand, do not offer you market prices directly. They quote their own bid-ask spread and make profits from the tightness of the spread. They are not just intermediaries, they are the market as far as CFD traders are concerned. This means CFD traders are not exposed to the direct conditions of the market when they use market maker brokers.
The advantage of using market maker brokers is that they execute trades faster than Direct Market Access brokers.
Pros and Cons of CFD Brokers
- Trading Leverage
- Trade on both Rising and Falling Markets
- Low Minimum Deposits
- Multiple Financial Instruments
- No Stamp Duty
- Highly Risky
Factors to Consider When Choosing a CFD Broker
Before you start trading CFDs, it is important you compare CFD brokers based on different features. Each one will be slightly better than the other in a different way, and it is your job to see if this advantage or disadvantage works for you, based on your preference. And while your personal preference is very important, there are a few factors you should never compromise when you want to compare them. Here are some of them:
Trading financial instruments can be very risky because it involves putting in some of your money. You need to be sure your money will be safe even if the broker goes bankrupt. It is, therefore, important to choose a CFD broker that has been regulated by a trustworthy regulatory body.
The best CFD brokers are under the regulations of multiple bodies worldwide. Many of these regulations require a CFD broker to have negative balance protection so that you don’t lose more than your capital in the event of the wrong speculation. Some regulations also require them to have different technologies and software in place to protect user data from getting into the wrong hands.
If you’re just learning to trade CFDs, you need all the resources you can lay your hands on. Many people pay for courses to learn how to trade, while others get help from financial advisors and mentors. If you can’t afford any of these options, you should look for a broker with good educational resources.
Many good brokers for beginners offer courses, tutorials, webinars, etc., so that beginner traders can find their footing in CFD trading quickly and avoid many errors that could cost them money. Before you choose a CFD broker, check that they have these features.
One advantage of trading with CFDs is that they give you access to many trading instruments without having to own the asset. Top CFD brokers offer as many trading instruments as possible to CFD traders. This makes it possible for traders to trade on and take advantage of the volatility of multiple markets at a time.
The best online brokers offer currencies, indices, cryptocurrencies, stocks, ETFs, etc., on their platform for all traders.
Since you will be putting a lot of your personal information on the broker platform, it makes sense that the broker should have different safety measures in place to protect them. One good safety measure online brokers should have is SSL 128-bit encryption that protects the information on the website from hackers.
You can verify that an online broker has this encryption by looking for a padlock on the left-hand side of the website’s address bar. This encryption makes your payment information safe and secure on the website. You can always learn more about the security of a broker by checking reviews online.
Fees and Commissions
CFD brokers charge different fees and commissions for trading on their platforms. You have to pay some fee one way or another, so looking for a broker with zero fees or commissions is not feasible. However, you can find brokers with reasonable fees and commissions. One common fee you will pay when trading CFDs is spread – the difference between the bid and ask price of a particular asset.
Usually, when you trade securities with a broker, you do it at a price slightly different from the market value. This difference is called the spread and allows brokers to make a small profit for transactions on their platform. Try to find brokers with tight spreads so that trading CFDs won’t cost you much.
You may also pay commissions to brokers for trading with their platform, especially when you open and close different positions. There are also deposit and withdrawal charges for depositing and withdrawing your capital, overnight fees for holding a position overnight and inactivity fees for not trading with your account for months.
You must find a broker with payment methods that suit you. Most brokers allow deposits with bank transfers, debit cards, credit cards, PayPal, Wise, etc. Find the one with multiple options you can choose from. Also, if you’re lucky, you might find a CFD broker that allows payment in your local currency.
Leverage trading means trading positions without paying the entire amount of the position at once. The benefit of leverage trading is that it increases your exposure, but this could be a double-edged sword. While it allows you to make more potentially, it also opens you to a huge loss.
Before trading with a CFD broker, check for the leverages they offer. Most times, the limit on its maximum leverage offered might result from restrictions from regulatory bodies in your region. For instance, in Australia, the financial regulatory body doesn’t allow more than a 1:30 leverage ratio on major currency pairs and 1:2 on cryptocurrencies.
A CFD broker is usually only as good as its trading platform. There are many trading platforms brokers use, which include MT4, MT5, and cTrader. These platforms are the software applications brokers use to place trades on different financial markets. Some of them offer multiple trading platforms, while others have their personalised, proprietary trading platforms. You can ask for opinions and do your research to know which one works best for you.
How to Get Started With CFD Brokers
You can get started with a CFD broker by opening a trading account. For most brokers, this process is straightforward. Here are some of the likely steps you could take when opening an account with a broker:
Step 1: Choose a CFD Broker and Create an Account
After going through the factors to consider when choosing a CFD broker listed above, you now have a good idea of the kind of CFD broker that would work for you. Select a good one and visit their website. Click on “Create Account” or “Start Investing”.
You’ll be required to fill in your email address, name, and password to get started. When you input this information, you will have to confirm your email address. Go to your email address and click on the link sent to you by the broker.
When this part is complete, you’ll be given a demo account to start trading with until you verify your identity and deposit some funds.
Step 2: Verify your Identity
By default, most brokers will allow you to open a demo account. A demo account is a virtual account to trade the market; you can trade with it without putting in real money, just virtual funds. Some brokers provide up to $100,000 in virtual money for traders to practice CFD trading without using their real money.
While this is good for practice, you must verify your identity to trade CFDs and make real-life trades and profits. To do this, you will need proof of identity and proof of address.
- Proof of Identity: This document proves that you are a human above 18 within a country licensed to trade CFDs. You can use any government-issued ID, like your driver’s licence or international passport.
- Proof of Address: This document proves that you live at the address you provided when filling out your personal details. You can use your utility bills receipt or bank statement containing your current address and dated within the past three months.
You’ll be asked to scan these documents for the broker to verify, along with your personal details. It usually takes a few days to verify these documents and approve the account, and you will be notified when the verification process is over.
Step 3: Deposit Funds
After verifying your account, you can trade with your live account. The broker will require you to deposit money before you can trade. Different CFD brokers have a wide range of payment methods for depositing funds, so you can choose the one that works best for you.
Different payment options take different durations to process, so it may take some time before the amount is reflected in your account. Some deposit methods also have transfer limits. For example, on the eToro broker platform, you cannot transfer more than $10,000 at once using PayPal.
Step 4: Trade
Now that your account is verified and funded, it’s time for you to trade. To trade CFDs, select the instrument you wish to trade and click on “Trade” or “Invest”. You will be provided options for trading, including a “CFD leverage” option at the bottom. Click on it and select the leverage you wish to trade with.
Trading Platforms Available on CFD Brokers
As explained before, a trading platform is a piece of software that allows brokers to place trades on the financial market. Your broker acts as the intermediary between you and trading platforms. Some of the trading platforms available on brokers are:
Desktop Trading Platforms
A desktop trading platform is a software that brokers use for trading financial instruments on a desktop or personal computer. Common examples of desktop platforms are cTrader, MT4 and MT5 (MetaTrader 4 & 5, respectively).
Then there are other brokers with their own proprietary trading platforms. For example, eToro has a proprietary trading platform with features like social trading and ProCharts that can easily rival those of the other platforms mentioned above. Many traders prefer these proprietary platforms because they can be customized to suit traders’ needs.
Most brokers offer one or more of these platforms to traders.
- Examples of MT4 brokers are FxPro, IC Markets, Admiral Markets, etc.
- Examples of MT5 brokers are Pepperstone, BDSwiss and Blackbull Markets.
- Examples of cTrader brokers are RoboForex, FxPro and Pepperstone
Some brokers like Pepperstone offer all three trading platforms to their users.
Rapid technological growth has made it possible for brokers to provide trading platforms to CFD traders on their mobile phones. Smartphone users can enjoy access to social trading, market news, charts, analysis, etc., from a mobile app on their devices.
The quality of proprietary trading platforms does not diminish on mobile apps. For CFD brokers like XTB, their proprietary trading platform, xStation 5, still provides real-time market news notifications and real-time order performance notifications to mobile phone users. The use of mobile apps to access trading platforms has grown rapidly in recent times and doesn’t seem to be slowing down.
Also, other common trading platforms like MT4, MT5, and cTrader all have mobile apps versions that provide the same quality as the web and desktop versions. You can place orders, receive notification and read real-time news and analysis on market movements.
What Type of Accounts do CFD Brokers Offer?
When you set up an account with a CFD broker, you have the option of selecting different types of accounts you can use to trade. Some brokers do not offer all the accounts listed here, but most offer quite a few.
Here are some types of accounts you can open with a CFD broker:
Standard CFD Account
A standard CFD account has spreads and zero commission. As explained above, the spread is the difference between the bid/ask price set by the broker. To entice traders, brokers often try to offer accounts with tight spreads and zero commissions. Apart from the spread, the only fees you pay are non-trading fees like overnight fees, withdrawal fees, and inactivity fees.
Raw CFD Account
A raw CFD account is another type of account for CFD traders. This account type has spreads starting from zero and charges commissions for trades carried out. This means the broker doesn’t add any markup when presenting you with bid/ask prices. Since they do not charge spreads, they make it up by charging traders commissions for trading on their platform. This type of account is also called Zero Spread CFD Account. Many professional traders prefer this type of account to the standard CFD account.
MT4 CFD Account
For brokers that offer multiple trading platforms, there is an option to trade CFD with a preferred type of trading platform – in this case, MT4. Many people prefer trading with MT4 for different reasons. For one, it is simpler than the MT5 trading platform, so many beginner CFD traders find it easy to use. Also, some API integrations on the MT4 trading platform don’t work with the MT5 trading platform.
If you are familiar with the MT4 trading platform and want to work specifically with it, go for brokers that offer MT4 trading, and multiple other trading platforms so that you can select the MT4 CFD account.
MT5 CFD Account
Just as some people prefer to trade with an MT4 CFD account, others (mostly professionals) prefer trading with an MT5 CFD account. MT4 is simple but limited. It doesn’t allow trading of some securities like futures and options. MT5, on the other hand, is more robust and compliant with many rules, like the popular US National Futures Association First In, First Out (FIFO) rule. This makes it better suited for US traders than the MT4.
Traders who prefer MT5 to MT4 can choose an MT5 CFD account by choosing a broker that offers multiple trading platforms.
Demo CFD Account
A demo account is a virtual account for traders that want to practice trading without using their money. CFD brokers offer demo accounts with virtual money so that traders can trade CFDs before verifying their accounts.
The amount offered by brokers ranges from one broker to another, most of them usually within $5,000 to $100,000. Some brokers are also flexible, meaning you can choose the virtual amount you wish to trade with on your demo account.
Payment Methods Available on CFD Brokers
Before you can trade, you need to deposit some capital. To do this, you must use one of the payment methods allowed by the broker. The payment methods differ from one broker to another, but most of them are usually the same. Here are some common payment methods most brokers use:
Debit Cards and Credit Cards
If you have your Mastercard, Visa, or Maestro cards, you can make deposits to most brokers. Some brokers have limits on payments with debit cards and credit cards. Usually, this payment is instant and will reflect on your account as soon as it is confirmed.
E-wallets are software programs that help you store, transfer or receive money electronically. Some common digital wallets are PayPal, Skill, Neteller, Payoneer, etc. You can use digital wallets to deposit funds on most CFD accounts. Depending on the wallet, the payment may be instant or take a little while to process.
Local Bank Transfers
CFD brokers allow transfers using local bank transfers in some countries. Your broker will tell you if your country is eligible and how much processing time it would take to complete this transaction.
Bank Wire Transfers
This option is only available to you if your bank can do a wire transfer to the broker’s bank. This process may take about 3-5 working days to confirm. Some brokers like eToro also have their digital wallets through which you can deposit money.
The minimum deposit and withdrawal amount depends on the CFD broker. Some brokers have no minimum deposit requirements, meaning you can trade with any amount you choose to deposit. Many others have very low deposit requirements, ranging from $1 to $250. The same thing applies for the minimum withdrawal requirements of many brokers.
Can CFDs be Traded on a Long Term?
Yes, you can trade CFDs on a long term if you believe the value of a security will rise over time. This strategy for trading CFDs is known as position trading. For example, a CFD trader might see the value of some blue chip stocks and decide to hold the position for a long term. This means the trader must ignore all minor price switches and focus solely on fundamental analysis. If the analysis is right, the trader could benefit tremendously from position trading.
Still, all traders must analyse and check if buying and holding CFDs long term is a viable option for them. Position trading often comes with some costs, like holding and overnight fees.
Also, you can use a stop loss order to limit your losses if minor changes turn major. A stop loss order is an order you give your broker to sell or buy your CFDs if the market value of a security goes above or beyond a certain point.
Onshore and Offshore CFD Brokers
Before brokers can operate, they need to register their brokerage firm and get a licence from an onshore or offshore regulator. An onshore regulator is a regulator that operates within major jurisdictions. Some good examples are the FCA in the United Kingdom and ASIC in Australia. Onshore brokers have to go through the stringent rules set by these regulators before they can get a licence.
Offshore regulators, on the other hand, operate within remote islands where there is little demand for retail trading. This makes it easier for offshore brokers to get licence here without much stress. Offshore brokers can offer their services to people in countries where there are major restrictions and limits on leverages and CFD trading. For example, traders in Australia can use an offshore broker to bypass the limits set by ASIC on leverage trading.
Onshore brokers are safer to trade with because they are regulated by trustworthy regulators who set strict rules that protect traders’ capital. Offshore brokers are regulated by regulatory bodies that allow unlawful practices and zero data protection. Some offshore brokers are not regulated at all.
High Leverage CFD Brokers
In most countries, there are limits on leverages offered by onshore brokers. With offshore brokers, traders in that country can get higher leverages and increase their market exposure. While this seems like a good idea, leverage can be a double-edged sword. If your market analysis is wrong and you open positions with higher leverages than normal, you could lose all your trading capital.
Fixed Spreads and Variable Spreads CFD Brokers
There are two major types of spreads offered by brokers: Fixed and Variable Spreads. Fixed spreads remain the same, even during a volatile market. This kind of spread is often offered by market makers who set the bid/ask price themselves. Variable spreads, on the other hand, change constantly according to the volatility of the market. This means the spread could be very wide sometimes and very tight at other times.
Generally, fixed spreads are better, because they provide more transparency in trading. This means you can effectively plan your costs and know what you’ll be paying in spreads at every point.
Is CFD Trading Legal?
Due to the risky nature of CFDs, some countries have made it illegal to trade CFDs. In the United States, for example, CFD trading has been banned by the SEC. CFD trading is legal in European Union countries, but registered brokers follow strict CFD regulations.
Are CFD Brokers Safe?
Well-regulated onshore brokers are safer for traders within their jurisdictions. These brokers must follow strict regulations set by the regulatory bodies in their respective countries. These regulatory bodies ensure that any CFD broker registered under them carry out some safety measures to ensure the safety of traders’ funds and data.
One safety measure brokers must have is negative balance protection. When you trade with leverages, there is always a chance you will make a loss that wipes out your capital and puts you in debt. Negative balance protection ensures you never fall into debt with your broker. This means you can never lose more than your deposit when trading CFD with a broker with negative balance protection.
Another important safety measure is data protection and anonymity. The CFD broker cannot reveal your identity to the public unless required by the authorities of the country and approved by the regulatory body.
Finally, CFD brokers must have a lump sum of money saved in a tier 1 bank in the country before they can offer their services to people in that country. They must not trade or do any business with this money. This money acts as insurance for traders in case the broker goes bankrupt.
What Reddit and Quora Say About CFD Brokers
We searched Reddit to find Redditors’ views on important factors every CFD broker should have and some of the best CFD brokers available in 2022. Some Redditors talked about how the quality of a CFD broker’s demo account was important, while others mentioned that brokers with higher leverages were more favourable.
One Redditor said Plus 500 was a good CFD option.
Another Redditor didn’t like IG CFD trading but admitted it had a great demo account
One Redditor said it was better to trade CFDs with ETFs and Indices instead of stocks.
Users on Quora gave their opinions on the characteristics and examples of the best CFD brokers. Some mentioned factors like high leverage, speed of execution, a good number of securities, etc. One Quora user gave specifics on what he thought were the best factors every CFD broker should have, and said FXView was the broker with most of those features
Common names like IC Markets trading platform, Pepperstone, and Coinnex came up. Some users mentioned Hugosway for their high leverage, Pepperstone for their trading platform and Oanda for their reputation.
CFD trading is a method of speculative trading that allows you to trade on the price movement of trading instruments without owning them. It has a huge advantage of giving you greater exposure to the market than normal, as you can buy CFDs at a fraction of the price of the instruments and trade on that position. It is also a form of trading that makes it possible for traders to make profits even when the market is trending downwards. You can trade Stocks, ETFs, indices, commodities, currencies and cryptocurrencies using CFDs.
Although there are huge upsides to trading securities with CFDs, there are also major downsides. Trading with high leverage is a double-edged sword. A major loss could wipe out your capital and leave you in debt. To prevent this, it is important you use a reliable broker to trade your CFDs. A good CFD broker should be well regulated, have multiple payment methods, low fees, offer good education and allow trading of multiple securities. Onshore brokers are usually regulated by the regulatory bodies in the region they operate in, but offshore brokers often have little to no regulation. CFD trading is legal in most regions around the world, but it often follows strict restrictions and rules. You can trade CFDs in the long term, but it could be risky and cost you a lot in fees.
Q & A
Some of the largest brokers in the world that allow CFD trading are eToro, IC Markets, Pepperstone, IC Markets, Oanda, CMC Markets, and AvaTrade.
The best brokers for beginners who want to trade CFD should have good educational resources and a demo account option. Some brokers that fall in this category are IG Markets, eToro, Plus500, CMC Markets and AvaTrade.
Some brokers with tight spreads are FXTM, eToro, IG Markets, Pepperstone and AvaTrade.
Yes, you can trade crypto through CFDs with regulated brokers, except it is restricted or banned in your country/region.
It is possible for beginners to learn CFD trading, but it is not advisable. Before you trade through CFDs, it is important you learn and master traditional trading. CFD trading comes with more risks than traditional trading, and many beginners don’t possess the right money management skills to handle these risks.
Many of the available trading platforms allow trading with CFDs. You can trade CFDs with brokers that use MT4. MT5, and cTrader platforms. Each platform has its own advantages, however, MT5 is more robust and updated than MT4.
You can speculate the direction of the price of a security with a CFD, however, you cannot directly invest in that security through the CFD. To invest in any security/asset, you have to buy it.
You can trade CFDs on your mobile phone through any regulated CFD broker in your country/region.
Yes, CFD trading is banned in the US. If you have dual citizenship, you can trade CFDs as long as you are not on US soil.
CFD trading can be profitable with the right speculation. However, it can also cause you to lose heavily if you speculate wrongly.