Picking a reputable CFD trading platform is not easy. CFD trading is popular among active traders due to low costs and leverage. Based on our research, we list the best CFD brokers below. Our analysis is based on brokers fees, deposits, withdrawals, trading platform, available markets and more.
Our top picks for the best CFD brokers
- Plus500 – Best CFD Platform Overall
- eToro – Best for CFD Copy Trading
- AvaTrade – Great Mobile App AvaTradeGO
- XTB – Great Customer Service
- IC Markets – Best Execution Speed
Contracts for difference or CFDs are an agreement between you and your broker. In this contract, if you are correct in predicting the direction of a particular financial asset, your broker will pay the difference. If you are wrong, you will pay the difference. With CFD trading, you do not own any of the assets you are trading. What you are trading is the difference in price that a financial asset will experience.
If a financial asset goes from $1 to $2 and you bought, the broker pays $1 in profit. If the asset goes from $1 to $0.50, you will pay the broker, $0.50. CFDs are popular because, in very volatile markets, there are constant price fluctuations. These fluctuations are where traders try to make their profits.
Benefits of CFDs
There are benefits and drawbacks of trading CFDs. Below we go over the benefits of trading CFDs over traditional investing.
Leverage can increase profit and also losses. With leverage traders can multiply their buying power. Leverage is a method whereby you are only required to put down a specific margin of the trade you want to make. The rest of the necessary amount will be paid for by the broker. In some cases, you will only be required to pay as little as 5%. This can all be done without you needing to put up your personal assets as collateral damage. You can see why this is a advantage of CFD trading. If you lose the trade, you are only liable for the money that is in your account.
Profit if the price goes up or down
CFDs allow you to go long or short on your positions. Buying traditional shares traders don’t have these benefits. Short selling enables you to buy high and sell low. Long positions allow you to buy low and sell high.
How do brokers make money?
They make money either through spread or through commission. Spread is the difference between the price of a CFD and its future price. When you buy a CFD with a broker and the price goes against your prediction, you will pay the difference. This is the profit for the broker. The commission is a charge that is put on every trade you make. This will be a nominal amount and will not be noticeable in the short run. Traders don’t prefer commissions, because you pay no matter the result of your trade.
Types of CFD Brokers
Market Makers charge a spread on the sell and buy price. Market maker brokers have quotes for the bid and ask price. If the trader wants to buy a security, they pay the ask price. The ask price is a little over the market price. If a trader wants to sell a security, they pay the bid price which is lower than the current market price. The price difference is known as spread. This is how market makers make money.
DMA brokers (STP/ECN)
Direct market access brokers allow traders to place buy or sell orders directly on the interbank market. If the broker fulfills orders in-house, it is not a DMA broker. Only non-dealing desk brokers are direct market access brokers. This means better prices for traders. DMA brokres are suited for advanced traders with big budgets.
Types of DMA brokers
STP stands for Straight Through Processing broker. The broker sends orders straight to major banks (liquidity providers) where trades are process and fulfilled. They have direct access to them and can facilitate deals with the third party. In a nutshell, STP is used to reduce the execution time, get the best prices for traders and reduce re-quotes.
ECN or Electronic Communication Network is a technology that provides pricing from the interbank network. ECN brokers provide traders with direct access to several liquidity providers. ECN brokers display the order book, market depth and ensure transparency on activities of other traders. ECN is the network that facilitates these trades. Primary financial products are currencies and stocks.
Types of platforms
A desktop platform is a software that you can download from the website. It is similar to accessing the website and trading from there. Using the desktop function will allow you to have added security given that you do not have to enter your account details over the internet continuously. Using this method will also be faster for executing trades. Often browsers may take time to react given the speed of your computer.
A mobile trading app allows traders to open and close positions on the go. Most of the time, mobile apps are available for both iOS and Android. They are simple to use to reduce friction for the user. Mobile accounts are easy to setup. The best trading apps offer the same functions as their desktop versions.
MetaTrader 4 and MetaTrader 5
This is a custom-made trading platform that is available to all brokers to use on their platform. Many traders worldwide use MT$ and MT5. MT5 is the latest version available. It will allow the brokers to choose the assets that they will enable their traders to work with. It has worked well to provide brokers with the competition.
How to pick a broker?
When choosing a CFD broker, this is what you need to consider.
- Customer support – How good is the customer support? This is important because you can’t visit the broker in person should you have a question. This means that you will need to reach them through customer support. When you first begin to use their platform, try reach their online customer support.See if it is available 24 hours a day. You never know when you may need to withdraw money or face a problem. Good customer service shows you how professional the broker is.
- Safety & Regulation – Regulation of the online broker can’t be an afterthought. Financial institutions across the world have to regulate the broker. You need to investigate their licenses and certificates. A good number of people have been scammed by shady brokers. A platform can look legitimate, and then you deposit funds only to find the next day the website no longer exists. Make sure you find a broker that is established and has good reputation. You also need to be sure that your login details are safe, and protected against fraud. In some cases, outside parties hack accounts and withdraw funds. Finding brokers that have 2 factor authentication processes is a good idea.
- Fees – It is essential to know the fees that are charged by any broker. You may think its only a small amount, but over time fees add up. Trading is like a business, and if you pay less for the same service elsewhere, why not save money? Money is coming out of your pocket, it is better to invest it. Brokers charge either a spread or commission which is explained earlier. Find out which broker works best for your needs, based on your trading preferences.
- Products & Markets Available – There is no point in signing up to a platform that can’t provide you with access to all the financial markets you want. If you know what you want to trade, sign up for a demo account and test the platform.
Types of trading accounts
Brokers offer different types of accounts. These are the fours main account types
Demo accounts allow you to trade the markets for free. You get virtual funds on your trading account. Most of the time between $5000 or $10000, up to $100,000. These accounts are free to use and are helpful to test out the trading platform and strategies.
The live trading account for retail traders.
This is for people who trade on behalf of a company or institution. If you work for a trader and trade using company money, then you will qualify for an institutional account.
Financial leverage allows traders to gain exposure with a small amount of upfront capital (margin). Leverage is also known as margin trading. With margin, traders can achieve higher returns on their trading capital.
Are Brokers Safe?
Regulated and reputable brokers are safe. It depends on how well you do your research on a broker. Some brokers are well-established with years of experience. They are safe, and you are guaranteed that you will be able to access your money when you need it. You can also rest assured they are not scamming you. Some people make legitimate income from trading and have done so for years.
Can you make money trading?
Yes, you can. The reason why CFD trading has become so popular is because of its lucrative nature. If you have a trading strategy that is well planned, and you stick to it, you can make profits. CFD trading is high risk, due to leverage.
Is it legal?
At the moment, CFD trading is illegal in the USA. Non US citizen can trade CFDs. Always consult a local authority before starting.
Profits or losses are made on the slightest price increases or decreases. If you are unable to monitor the market then you will not make money. You may lose money instead. This is amplified further when you are making use of leverage. Leverage is both good and bad for traders. If used well, it strengthens profits. If miscalculated, it will amplify losses.
Many traders will be unable to accept that the trade is losing. They end up holding on to the trade for longer than their trading strategy permits. This greed or hope will cause you to go bankrupt. There are also spreads and commissions when trading CFDs.
If you are not aware of these, you may end up making no profit at all. It is such that smaller transactions will not be able to make you any profit. You, therefore, need to be aware of how much spread and commission you are expected to pay per trade.
How to learn trading
There is a lot of educational material available online. Most broker provide their clients education, webinars, signals, daily analysis and more. YouTube is a great way to start to learn the basics.