Choose The Best CFD Broker

CFDs, or Contracts For Difference, are an exotic financial instrument that investors trade to make returns by buying and selling contracts when they do not actually own the underlying asset. Given their complexity, and the potential to make both large gains and losses, it is imperative to choose a broker that is capable of making a CFD trade in the most competent and efficient way possible.

Here, we look at defining what is CFD trading, how CFD brokers make money to help you to decide how to choose the best CFD broker that is suitable for your purposes. We ultimately list our top 5 UK CFD brokers that are capable of providing a robust and thorough service for customers who wish to invest in the CFD market.

What is CFD trading?

CFDs are a form of derivative. This is because investors never actually own an asset. They simply own a contract on the price variation that an underlying asset will see in a set amount of time. So, for example, buying and selling stock CFDs means that investors are hoping to take advantage of any price difference they believe will occur in that stock.

So if they believe that a stock price will go up, they enter into a contract with a broker who believes that stock price will go down.

CFD trading is a type of financial derivative trading that allows traders to speculate on the movements of underlying assets such as stocks, commodities, indices, and currencies.

In other words, CFD trading enables investors to speculate on price movements without owning the asset.

CFDs, though complex, are a way of accessing markets that ordinarily investors would struggle to invest in. This is because you do not have to buy the actual underlying asset, you just bank on the price going up or down. It means that you can do so on any asset you believe shows potential. So, if you cannot access certain forex pairs or particular international stocks, CFDs are a means by which you may be able to benefit from the price increase or decrease.

What Is The Difference Between CFD Trading and Spread Betting?

The main difference between CFD trading and spread betting is that CFDs are a type of derivative product, while a spread bet is a form of gambling.

With UK CFD trading, you buy or sell contracts for difference (CFDs) on a particular security – such as a share, ETF or currency pair – based on the price movements in the market.

On the other hand, when you're trading spread bets, you’re predicting whether prices will rise or fall within certain predetermined parameters and place bets using leverage to increase your potential return.

Additionally, with spread betting profits and losses may be exempt from tax in some countries like the UK but may be subject to taxation in other countries.

With CFDs there can be both capital gains tax and stamp duty depending on where your trades are placed.

Overall both products offer potential rewards but come with different types of risk associated due to their respective nature so it's important to fully understand each before deciding which one is right for you.

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What is an ETF CFD?

An ETF CFD (Exchange-Traded Fund Contract for Differences) is a type of derivative instrument that enables traders to gain exposure to the value changes of an ETF, without actually buying and holding the asset.

The CFD allows experienced traders to take both long and short positions on an ETF, providing maximum flexibility in their trading strategies. With an ETF CFD, users can benefit from daily mark-to-market pricing, low margin requirements and high liquidity.

Depending on the broker, traders may also be able access additional features such as leverage or automatic execution when trading with a CFD.

How to choose a CFD Broker?

There are a number of factors for you to consider when choosing the best CFD trading platform UK firms have to offer. Make sure before you start working with a prospective CFD broker where all of the requirements below are ones that are met as standard. Without them, your broker could be more hassle than trading with them is worth. They are:

Fees

Fees are where brokers in the UK make their money. For that reason, some CFD brokers set their fees much higher and structure them differently, to help them make a profit.

However, it doesn’t necessarily follow that high fees reflect a good service. Plus you may simply not be able to afford the fees that they do charge, even for a standard account.

Trading platforms

Ensure that the CFD trading platforms that UK CFD brokers provide are ones that you can use competently. CFD trading can be a complex task that does not need to be made more difficult by a clunky piece of software that hinders your ability to run your portfolio efficiently.

Making Deposits and Withdrawals

Being able to make deposits and withdrawals seamlessly with your credit card or through bank transfers is an easily overlooked practicality that is of the utmost importance when choosing the best CFD broker in the UK.

If you cannot withdraw or deposit cash easily, you will seriously have your abilities to trade effectively hindered.

Opening a Trading Account

Much like withdrawing cash easily and depositing funds quickly, opening an account with a CFD broker must be a painless experience. If it isn’t, it can take so long for your CFD account to open that you lose out on all the gains you could have made in the time it took for your chosen CFD broker to verify your account information.

What Makes A Best-In-Class CFD Trading Platform

When looking to set up your retail trader account on the best CFD trading platforms for your needs, there are many factors to consider. To help you make an informed decision, here are five key factors that should be weighed when selecting the best CFD broker.

1. Security and Regulation

When choosing a broker, it is essential to ensure that the company is licensed, regulated and compliant with the relevant financial authorities (for example, the Financial Conduct Authority (FCA) in the UK). It is also important to look for a broker who can provide secure trading and payment platforms to protect your funds and investments.

2. Leverage

Leverage allows traders to open larger positions than they would normally be able to do with their available capital, making it an attractive option for CFD traders. However, leverage should be used with caution as it can magnify losses as well as gains. Therefore, it is important to select a regulated broker offering competitive leverage rates that suit your trading strategy and risk profile.

3. Fees

Every CFD provider charges different fees across the board. These include commission, swap charges, spreads and additional costs depending on the asset you are trading. It is important to understand these fees before making a decision, as even small differences in fees could add up over time and have an impact on your bottom line.

4. Trading Platforms

The platform is one of the most important factors to consider when choosing a CFD broker. It is essential to select a broker with a user-friendly, intuitive platform that provides a reliable, uninterrupted service. The platform should also include features such as charting tools, financial market analysis and automated trading options.

5. Customer Service

A good customer service team is essential when trading CFDs. Look for brokers who offer support 24/7, as well as educational resources and other features that can help you become a more successful trader.

Understand The Risks In CFD Trading

When considering being a CFD trader, it is important to understand that this type of trading can be very risky. CFDs are leveraged products which means a trader can access larger positions with smaller capital than if they were to buy or sell the underlying asset itself.

Despite the potential for higher returns, leveraging carries with it an increased risk as the losses can be greater than the original investment. Margin calls, gaps and slippage should all be taken into consideration when you trade CFDs.

Additionally, traders need to ensure that they have adequate risk management strategies in place as well as being aware of the underlying market conditions.

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What is leveraging?

Leveraging is a powerful financial tool that allows an investor to control a large amount of capital using only a small amount of their own money. It can be used to significantly increase potential returns, but also carries with it increased risk.

Leveraging works by allowing the investor to borrow funds from the broker or financial institution in order to gain access to the underlying asset.

This means that an investor can leverage their position to potentially increase returns on a given asset, but also carries with it greater risks as losses can be amplified if the market moves against them.

Therefore, it is important for traders to understand how leveraging works and its associated risks before using it in their trading strategies.

Finding The Best CFD Provider - Key Takeaways

CFD brokers are not as common as other forms of brokers out there. This is down to the complexity of the instrument as well as the large losses that can be made from this derivative style financial product.

It is key to ensure that your broker is regulated as well as capable of providing you with a service that allows you to stay on top of your portfolio.