The financial industry has created many exotic instruments that generate superior returns with minimal risk. A contract for difference (CFD) is just one example of a tradable instrument that can also be used for hedging.
With a CFD, you can speculate on the price moves of a number of assets such as forex, stocks, bonds, indices, commodities and cryptocurrencies. Keep reading to find out about which could be the best CFDs broker (contracts for difference) to meet your trading needs.
Best CFD Brokers and Trading Platforms
The best CFD brokers should offer easy to use trading platform software, good trading tools, fast execution and an organized order management system. The broker’s platform should ideally be secure, have a flexible interface, and allow you to enter different types of orders.
Many CFD trading platforms also offer technical analysis features and let you trade directly from price charts. An especially popular set of trading platforms for CFDs are the freely-available MetaTrader 4 and 5 platforms from MetaQuotes that comes in desktop, web-based and mobile versions.
1. Best Overall: FOREX.com
FOREX.com has been around since 2001 and is regulated in a number of jurisdictions. The broker offers trading in a wide range of CFDs spanning most major asset classes. It operates in jurisdictions regulated by the UK’s Financial Conduct Authority (FCA), so that service is not available to U.S.-based clients.
2. Best for CFD and Crypto Traders: Plus500
Founded in 2008, Plus500 is a leading CFD provider and offers a diverse portfolio of 2,000 instruments available for trading. The broker offers CFDs on stocks, commodities, exchange traded funds (ETFs), forex, indices and cryptocurrencies. Plus500 has oversight from various major regulators, including the FCA.
3. Best for New CFD Traders: Oanda
Oanda was founded in 1995 and lets you trade CFDs on precious metals, commodities, indices and bonds, in addition to numerous forex currency pairs. The well-regulated broker has oversight from the U.S. Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), as well as the UK’s FCA, the Monetary Authority of Singapore (MAS) and the Australian Securities and Investment Commission (ASIC).
4. Best for Spread Betting and CFDs: City Index
Founded in 1983 and owned by Gain Capital Holdings (NYSE:GCAP), UK-based City Index specializes in CFD trading and spread betting. The broker has oversight from the UK’s FCA and offers CFD trading on indices, shares, commodities, bonds, metals, options and interest rates.
5. Best for Asset Class Range: IG Group
Established in 1974, IG Group operates in over 15,000 markets worldwide. The FCA regulated firm has no account minimum and tight dealing spreads. The broker lets you trade CFDs on shares, indices, forex, commodities, bonds, exchange traded funds (ETFs) and interest rates.
6. Best for High Leverage: FXTM
FXTM was originally launched in 2011 as ForexTime. The offshore broker is overseen by the International Financial Services Commission of Belize (IFSC) and has offices in China, India, Indonesia, Malaysia, Nigeria, South Korea and Thailand. You can trade CFDs on commodities, indices and stocks via this broker, in addition to being able to trade forex currency pairs.
What are CFDs?
CFDs are derivative contracts executed between a buyer and a seller that are based on the price of an underlying asset, although no physical exchange of assets actually takes place between the counterparties.
A CFD transaction is closed out via a cash settlement of the difference between the current value of an asset and the value of the asset when the contract was initiated. Although U.S. residents cannot legally trade CFDs, many CFD brokers allow CFD trading on U.S. assets.
How Do CFDs Work?
You first need to select an underlying asset that you wish to trade. If you live in a jurisdiction where CFD trading is permitted, you may be able to trade CFDs on shares, currency pairs, indices, commodities, interest rates and metals.
After you’ve selected an underlying asset, you can then open a CFD position with an online broker that offers CFDs on that asset. You generally do so by accessing the broker’s trading platform, entering the asset, stating whether you want to buy or sell, how much you want to trade, the amount of leverage you wish to use up to the broker’s allowable limit, and perhaps some other order details. The CFD broker then enters into a contractual agreement with you that covers the opening price for the position, the fees involved etc.
Leverage can be used in a margin trading account and is usually expressed as a ratio of the amount of an asset you can control with a given amount of money deposited in your trading account as margin. This lets you use the cash in your trading account as collateral so that you can establish a larger trading position than your account funding otherwise permits.
Considerations for Contracts for Difference
CFD market selection involves choosing the best market to trade. Choosing the right market could make a big difference for your success. It’s strongly recommended to go for a market that you understand and have some experience with.
The primary risk involved in trading CFDs comes from market risk, since markets can rise and fall unexpectedly. You also take a proportionally greater market risk if you decide to use more leverage. It also makes sense to select a reputable and well regulated broker to reduce your risk from broker-related fraud.
The Importance of Comparing CFD Brokers
If you spend any length of time searching for information on which online broker to choose for CFD trading, you will get the message that making an appropriate broker choice is an important success criterion for any trader.
Once you have found the right CFD broker for your particular needs that is well regulated and will take clients from your jurisdiction, you might consider a number of other factors including transaction costs, asset classes and trading platforms.
Regulations for CFD Trading
Strict regulation ensures the safety of your funds and protects them from financial setbacks and possible internal company fraud. When selecting a CFD broker, make sure that they are duly regulated by the official regulatory agency in its jurisdiction.
For example, the FCA operates in the UK and the ASIC in Australia. CFD trading remains illegal in the U.S., so you won’t be able to trade CFDs if you live in the United States.
CFD Brokers Types
CFD brokers come in 2 primary types. The first type consists of market makers that quote a price and take the opposite side of any CFD position their clients decide to enter into. Such brokers typically get compensated solely by the dealing spread they charge. Dealing spreads consist of the difference between the bid and offer prices.
The second type of CFD broker consists of Direct Market Access (DMA) brokers that typically use Straight Through Processing (STP) and an Electronic Communication Network (ECN) to communicate prices directly from exchanges or a group of professional market makers.
DMA brokers may either slightly widen the dealing spread to compensate them for handling the trade, or they might pass the best possible price onto their clients while charging a per trade commission for doing that.
Depending on your level of experience, the asset classes you prefer to trade and the returns you expect, you’ll have to assess the different brokers and types to decide which one best fills your needs.
Make sure any broker you select has competent regulatory oversight, a suitable trading platform and a demo account so you can try out their services. It definitely pays to research which CFD broker would be best for you.
CFD Brokers Economical Advantage
CFD brokers usually make their money from the dealing spread, although some brokers do charge per transaction commissions. In general, the narrower that dealing spread and the lower the commissions you are charged, the lower your trading costs will be.
You might also need to pay overnight holding costs that can arise when you hold trading positions past the end of the normal trading day. In this case, your account may be subject to a holding charge or swap fee that is separate from any commission or dealing spread charged for a CFD trade.
Is CFD Trading Right for You?
CFD trading involves taking considerable financial risks and therefore has much more in common with strategic gambling than with traditional investing for long term capital growth.
If you are prepared to take such risks and have extra money sitting around that you do not need for the basics of life, then CFD trading may be suitable for you.
Frequently Asked Questions
Q. Is CFD better than investing?
CFDs are trading instruments, rather than an investment vehicle, and they give you a broad choice of asset classes to trade in.
Q. Are CFDs profitable?
Like most other tradable assets, trading CFDs can be extremely profitable when the trader has the right market view. No guarantees exist that a CFD trade will be profitable since that depends entirely on how the market performs after entering into the transaction.
Q. Is CFD a gamble?
Trading CFDs involves taking risk strategically with the aim of profiting,and it has more in common with gambling than with investing.
FOREX.com, registered with the Commodity Futures Trading Commission (CFTC), lets you trade a wide range of forex markets plus spot metals with low pricing and fast, quality execution on every trade.
ForexSignals.com offers a highly rated platform with mentors who have 80 years of combined experience in the trading pits. They’ll help you decode real-time daily live streams using market analysis, trade signals and more. ForexSignals.com doesn’t stop there. You can access hundreds of educational videos and workshops and even individualized private sessions with mentors. Never trade alone! Join ForexSignals.com now.