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SELECTING A CFD BROKER

SELECTING A CFD BROKER

What is CFD?

CFD or “contract for difference” is a trading strategy available for stocks, commodities, and Forex, all of which require large capital to trade.

With CFD, a trader agrees with the seller to pay the amount representing the difference between the current asset value and the asset value when the CFD was placed. The deposit cost is significantly lower than other trading strategies yet allows the trader to earn a rewarding profit.

What is the role of the CFD broker?

With Forex, you buy the asset through your broker. But with CFD, the broker creates the market as you bet against them.

The primary role of the CFD broker is to feed you the underlying assets’ exact prices in the actual markets using your trading platform.  When you place your order on the asset you want to trade, the CFD broker sets up a contract with you.

When the trade goes as you projected, the CFD broker computes the difference in prices and credits the returns, less various charges, to your account. These charges may take the form of either a commission or a spread.

How do CFD brokers differ?

Because of the traders’ growing awareness of the benefits of CFD, the number of CFD brokers has increased. Forex brokers have also expanded their portfolio to include CFD trading. However, trading services may differ among CFD brokers, especially in the following areas:

Charges

  • CFD brokers will charge a certain percentage of the profits from the trade. The commission is preferable over other charges because you already know how much will be deducted from your profits.
  • Holding charges. This type of charge applies when you roll over the trading to the next day and serves as an interest premium on long positions held overnight. The amount, dependent on the London Inter-Bank Offered Rate (LIBOR), will reduce your profit.
  • Spread refers to the difference between an asset’s buy and sell price, with the selling price higher than the buying price. The spread, usually high, goes to the CFD broker.

Leverage

For example, stocks typically require 50% of the trade value as a deposit before your stock order is filled, but with CFD, a 5% deposit will be sufficient.

If you intend to buy 1000 shares of Facebook valued at $340 per share, you need to pay your broker a deposit of $170,000. But with CFD, you may only give $17,000 or 5% of the total trade value, giving you leverage.

CFD leverage can either increase your potential profit or incur a potential loss. CFD brokers usually offer a lower leverage ratio than Forex brokers, not exceeding 200:1, to reduce the risk of loss.

Tradable Instruments

The best CFD brokers are well-connected with various exchanges worldwide and can provide a wide range of tradable instruments.

If you need further information on these factors, it is best to seek the services like https://tradingguide.co.uk/.

How do we select a CFD Broker?

Choose one who has the best match between their services and your requirements. Consider the following factors:

Capital requirements

A top-notch CFD broker accommodates a trader who has reasonably low capital and still provides quality service. One way of doing that is through leverage.

Equitable charges

Charges are unavoidable, but a good broker is transparent, flexible, and fair about it.

Range of Instruments

The best CFD brokers offer a wide variety of CFDs, opening the trader to untapped opportunities.

Summary

CFD is a trading strategy that is gaining popularity, leading to an increase in the number of CFD brokers. However, these brokers differ in the way they conduct their business. A trader must know what to look for in a CFD broker to maximize their potential to earn through trading.

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