Introduction to CFD trading
In the UK, more and more speculative investors and traders are opting for trading with so-called Contracts For Difference, also known under the abbreviation CFDs. Although CFDs are very transparent and generally relatively easy to understand compared to many other derivatives, interested traders should first discover more about these financial products, how trading works, and the particular providers that enable this form of speculation. For this purpose, it makes sense, among other things, to carry out a CFD broker comparison. Therefore, we would like to go into more detail on these points in the following:
What is a CFD?
What exactly is a CFD?
Although CFDs are classified as derivatives, they are not traditional forward products like futures and options. CFDs are traded on the market but instead trading a contract between the customer and the broker. CFDs are contracts for difference in terms of features because, ultimately, it is all about how the underlying asset price develops over time. For example, the customer may purchase a specific base value from the broker and, in this case, close the contract on the difference between the price or price upon purchase and the subsequent courses. So, if you buy a CFD with gold as the base value, you can buy the precious metal for 900 euros, for example. If the gold price rises to 950 euros, the broker is obligated to pay the difference of 50 euros to the customer. In a nutshell, the trader always trades different base values through CFDs, which are primarily classified into four groups:
Shares (for example, Daimler, Apple, or Telekom)
Indices (e.g., DAX, Dow Jones, or SP500)
Raw materials (e.g., crude oil, gold, or silver)
Foreign exchange (for example, dollars, francs, or pounds)
How does a CFD work?
The underlyings to which each contract for difference refers are an essential basis for trading CFDs. Another factor in CFD trading works is what is known as leverage. Leverage also represents the most significant difference between direct trading in stocks or other underlying assets. While traders have to pay the total value of the securities themselves when trading stocks, this is utterly different from CFD trading. Whoever trades CFDs only has to invest a fraction of the required capital in the form of a so-called margin. The lever ensures that most of the value to be traded is “paid” indirectly by the broker. Payment is, however, the wrong term in this context, because ultimately the trader concludes a contract with the broker so that only the resulting difference is settled. For example, if the trader wants to terminate a CFD contract on the DAX, he would have to invest around 12,000 euros based on the current point balance. If, however, leverage of, for example, 100: 1 is traded, the trader only has to raise 120 euros as equity. This is also one of the significant advantages of CFD trading, as investors can benefit from more minor price fluctuations even with relatively little capital. If, however, leverage of, for example, 100: 1 is traded, the trader only has to raise 120 euros as equity. This is also one of the significant advantages of CFD trading, as investors can benefit from more minor price fluctuations even with relatively little capital. If, however, leverage of, for example, 100: 1 is traded, the trader only has to raise 120 euros as equity. This is also one of the significant advantages of CFD trading, as investors can benefit from smaller price fluctuations even with relatively little capital.
What are the advantages of CFD trading?
One advantage of CFD trading has already been mentioned: due to the leverage, only a relatively small amount of capital is required with the possible return. Thus, CFDs are also ideally suited for those speculatively minded investors who may initially only invest a few hundred euros or who want to try out new investment strategies. Another advantage that all CFDs can boast is their unique transparency. There are no-as is the case with options, for example-other influencing factors such as time value or specific important figures that affect the performance. Only the swap should be mentioned here, which the broker usually requires the customer to hold a position overnight in CFDs. This value depends on the CFD broker,
With CFDs, only the price or exchange rate development of the base value plays a role, which is shown in a ratio of 1: 1. If, for example, the gold price as the base value for a CFD rises by one percent, the trader would achieve a profit of 200 percent with assumed leverage of 200: 1. Another advantage, which also falls into transparency, is the relatively low cost of trading compared to conventional securities trading. There are usually no fees that the trader has to pay apart from the estimated spreads. Depending on which underlying assets are traded in detail, the spreads often only amount to one point. Only the already mentioned financing costs for holding overnight can still arise here. However, there are also exceptions among CFD brokers where an order fee is charged in addition to the spread.
Another advantage is that Traders can use CFDs to profit both on falling and rising markets.
Only a tiny capital investment is necessary (leverage)
transparent financial products
Only a low cost for trading a wide range of underlying high profits is possible through leverage.
Speculation on rising and falling prices is likely.
Why is a CFD Broker Important?
If you have already dealt a little closer with trading CFDs, you may ask yourself why these financial products can not be traded through conventional banks. So far, there are very few branches or direct banks that allow their customers to trade CFDs. Instead, very popular UK’s CFDs providers operate in this market. So it is advisable to choose a CFD broker if you want to trade CFDs regularly. For this purpose, we recommend that you first carry out a comprehensive CFD broker comparison. In such a comparison, however, it is not just a matter of comparing the conditions. Still, you should also attach great importance to other comparison criteria, such as the services or the trading platform offered. Since the services of CFD brokers often differ significantly in practice, it is beneficial when comparing UK CFD brokers to take a closer look at experience reports from existing customers, for example.
What features make a good CFD broker?
There are by no means a few comparison criteria that should be considered in a CFD broker comparison. In this context, from our point of view, it is advisable to divide the numerous points of comparison into several groups. This gives you a good overview of which categories you should pay attention to when comparing CFD brokers. In our opinion, a division according to the following scheme makes sense:
Which markets do you want to trade-in?
Which trading strategy are you pursuing (short, medium, or long term), and what trading platform do you require?
Services of the broker
Customer service and regulation
If you already know which markets you mainly want to trade in, you should first shortlist the brokers who allow you to trade the underlying assets you need.
Trading strategy and costs
At this point, you should already roughly know your trading strategy. Depending on whether you close your positions on the same day or whether you hold your trades for several days or weeks, costs such as the size of the spreads or financing costs for holding positions overnight will, of course, fall more or less. It would help if you now shortlisted the brokers, which of the costs best suit their preferred trading strategy.
The trading platform as the basis for CFD trading
A vital comparison aspect, which should not be missing in the CFD broker comparison, is the trading platform offered. Ultimately, this forms the basis for the trader to then work out strategies, place orders, and, for example, call-up charts.
Therefore, it is essential that the trading platform provided is easy to use and contains several crucial functions for the individual trader. In addition, when comparing CFD brokers, you should also make sure that mobile trading is also made available if possible.
Demo account: unlimited and free.
Most CFD brokers these days allow their clients to use a test account before starting actual trading. However, this demo account is usually limited in time, for example, to 14 or 30 days. From our point of view, however, it is advisable to ask the broker to extend the demo phase or to open a new demo account if you do not feel ready for live trading after the deadline has expired. You will only have the opportunity to start actual money trading successfully if you are familiar with the platform and your strategy has been adequately developed. Furthermore, the demo account is available upon account registration; no deposit is required.
As extensive a range of knowledge as possible
Another point that numerous traders do not consider when comparing CFD brokers is an existing area of knowledge. Information is of great help, especially for customers who are trading CFDs for the first time. The broker can make this available in various ways, for example, in the form of a glossary, frequently asked questions and answers, and instructions that can be accessed via video files. In the best case, however, the broker offers webinars or even personal coaching, which are very well suited for training prospective traders.
Customer service is an important criterion when comparing brokers.
Customer service is a comparison criterion that has gained significant importance in the past. It is primarily those traders who have not yet had much experience with CFD trading which should value good customer service. In our opinion, every customer service provider should be able to meet some minimum requirements. This includes, for example, that there is good accessibility and that the employees are professionally qualified. Ideally, customer support is available in the trader’s language. As far as the contact options are concerned, communication should be possible via e-mail and telephone. Ideally, there will also be the opportunity to ask questions via live chat or Skype.
Trading conditions: leverage, spread, and minimum deposit
The trading conditions are among the features that can be compared relatively quickly and efficiently when comparing CFD brokers. In our opinion, this includes the following requirements in particular:
The total number of tradable assets
Regulation and reputation
The minimum deposit that has to be made into the trading account is sometimes only 10 euros today, depending on the broker. In contrast, comparing the spreads is a little more complicated because it almost always depends on the individual underlying price difference the respective broker estimates. Therefore, you should concentrate on the assets you will likely trade later via CFDs in this area. The maximum leverage is of particular interest to professional traders because the higher it is, the greater the possible profits. The number of tradable underlyings is undoubtedly not decisive but still necessary for some traders if a significant offer is desired.
What does an ideal CFD broker comparison look like?
Now that you know which criteria and features you should pay attention to when making a CFD broker comparison, it is now a matter of putting this into practice. You should also know how and where you can carry out such a comparison at all. In contrast to some other financial products, such as time deposits or loans, CFD brokers and their offers can not be compared quickly and easily. This is mainly since it is not just the conditions that matter, but the services already mentioned the customer service and the trading platform.
For this reason, it makes a lot of sense if you take a closer look at our experience reports on the respective brokers. We have taken a close look at the vast majority of known CFD brokers for you and shown the advantages and disadvantages based on various criteria. Therefore, you should invest the maximum of ten minutes that it takes to read the individual testimonials. This gives you a solid foundation to find the best broker for you.
Is CFD trading a serious business?
CFD trading is a serious business. CFD trading has been around since the 1980s, and it is primarily used for hedging by institutional investors. Since the introduction of more CFD brokers, the financial product CFD has become increasingly accessible to private investors. As a result, the question of whether CFDs are a profitable investment instrument does not arise. However, because CFDs only show the underlying asset’s price, you must pay close attention to whether or not the CFD broker is reputable. Aside from the terms and product offerings, one of the essential characteristics of a CFD broker is dependability. After all, he works with her money, so there should be no issues here. Nothing is more aggravating than dealing with a provider.
Customer feedback and reviews for CFD
When comparing CFD brokers, it is also important to consider general service and trading conditions. This opportunity allows you to write experience reports about your experiences. Assess individual brokers’ performance and assist other customers in locating the best CFD broker. The most in-depth insight comes from information about traders’ experiences and reviews. As you can see, the company’s practice demonstrates whether or not the advertising claims are correct. However, the comparison details are meaningless if the company cannot provide the services it advertises.