Demand for CFD trading continues to soar among professional & retail traders alike, as CFDs represent the ideal instrument for short-term trading & hedging. Finding the best CFD brokers poses a challenge, with hundreds of available choices. We've researched them thoroughly to assist you in your trading journey.
What is a CFD?
CFDs became the best trading instrument for professional traders and retail traders alike. First introduced in London in the early 1990s for professional clients and in the late 1990s to retail traders, they offer leveraged trading without owning the underlying asset. CFDs grant trading opportunities in a cost-efficient manner, as transactions do not require settlement of underlying assets. Therefore, it allows retail traders to participate in any market their broker provides.
Several regulators took steps to limit leverage or ban advertising of CFDs amid mounting retail losses related to an absence of understanding. They are an over the counter (OTC) product specifically written for leveraged transactions, but traders must understand the risks involved before using CFDs. CFD brokers are usually market makers who hedge exposure by taking positions in the underlying assets matching their order book. They also profit from client losses, with an average of 75% of retail traders managing loss-making portfolios.
How Does Online CFD Trading Work?
CFDs grant traders exposure to price action without asset ownership. Traders can benefit in either direction in a leveraged transaction, freeing up trading capital and gaining exposure to international markets with a cost-efficient and competitive product, as long as traders use it for short-term trades. CFD traders enjoy unparalleled freedom and diversification opportunities, even from smaller deposits, if proper risk management exists.
Types of CFD Brokers
CFD traders have two distinct choices:
- Market Makers: They work with liquidity providers and match orders from their internal order book. Market Makers may also become the direct counterparty to client positions. Spreads are generally higher in a commission-free trading environment.
- Direct Market Access (DMA) Brokers: Traders have direct access to liquidity providers via ECN and no broker intervention. Active traders get access to raw spreads for a commission. They are ideal for active traders and often come with a volume-based rebate program.
Types of CFD Trading Accounts
While some brokers offer the same trading account type to all clients, others prefer a structured approach. The most popular ones include:
- Micro Account: They are ideal for new traders to learn how to trade or test new trading strategies or automated trading solutions.
- Mini Account: An excellent choice for traders with portfolios of less than 10,000.
- Standard Account: This is where brokers offer their complete product and services portfolio. While the minimum deposit is often $100 or less, they are best suited for portfolios above $10,000.
- VIP Account: Intended for professional traders, they come with non-trading related perks and a decrease in leverage. Most brokers ask above $50,000 for it.
How Do CFD Brokers Make Money?
Trading costs will have the most significant direct impact on your trading strategy and portfolio. The two most significant ones consist of:
- Spreads & Commissions: Spreads are mark-ups and translate into broker profits above market rates. Market makers derive their income primarily from them. Commissions apply at ECN brokers, where traders usually have access to raw spreads.
- Financing & Hedging: Swap rates on leveraged overnight positions is another cost traders must consider. Hedging is another way CFD brokers make money. It is necessary to limit liabilities when clients earn profits, which remain offset by hedged positions in other markets totaling the order book.
CFD Trading Platforms
The MT4, MT5, and cTrader remain among the most deployed trading platforms with full support for automated trading solutions. They are available as a desktop client, a webtrader, and a mobile app. The best CFD brokers additionally deploy proprietary trading platforms or offer upgrades to existing ones to ensure clients have an edge.
Traders must ensure that brokers offer their preferred payment methods. When you compare CFD brokers, make sure that low-cost payment processors remain part of the overall mix. All brokers support bank wires and credit/debit cards, but I recommend keeping trading-related activities and day-to-day ones separate. Traders must also check deposit and withdrawal fees from the broker, payment processor, and banks.
CFD Regulation & Security
I recommend that all traders manage their portfolios with regulated brokers. The European Securities and Markets Authority (ESMA) maintains the least competitive one, and traders should avoid CFD Forex brokers governed in that jurisdiction. Among the best regulators are the ASIC, the FSCA, the BVIFSA, the FSC, the IFSC, the DFSA and the CIMA. They provide an excellent mix of security and competitiveness for brokers and traders alike.
What Makes a Good CFD Broker?
While preferences among traders differ, the following deserve consideration:
- Fee Structure: Tight spreads and low commissions with a volume-based rebate system remain the most competitive offer for active traders.
- Products and Markets: Traders should seek a broad asset selection and competitive trading tools to gain a competitive edge. Support for third-party applications is an additional benefit.
- Account Opening: A swift online process with mandatory account verification remains the established industry standard.
- Deposits and Withdrawals: The best CFD Forex brokers offer low-cost and instant third-party non-banking payment processors.
- Web Trading Platform: Proprietary trading platforms offer manual traders an excellent alternative. The best CFD brokers have APIs to allow third-party solutions access.
CFD Broker Fees
Traders must understand all costs. They will have the most significant impact, especially over time. While a spread difference of 0.1 pips or a reduced commission of 0.1% may appear insignificant, they add up. Traders can save thousands by selecting a competitively priced CFD broker. Broker fees consist of spreads, commissions, swap rates, currency conversion fees, withdrawal charges, market access costs and inactivity levies.
CFD Trading Demo Account
Demo accounts provide traders an opportunity to evaluate a trading platform. They also serve for testing new trading strategies and bug fixing of automated trading solutions. While many note them for educational purposes, they provide no value as they omit trading psychology and promote a false sense of accomplishment.
We reviewed over 100 brokers in-depth based on eleven criteria from the perspective of a trader. Each research consisted of over 2,000 words and lasted more than ten hours. We ensured the most comprehensive approach to identify the best copy trading platforms.
The eleven criteria used in our research consist of:
- Regulation and Security
- Trading Costs
- Asset Selection
- Account Types
- Trading Platforms
- Unique Features
- Research and Education
- Customer Support
- Bonuses and Promotions
- Account Opening Process
- Deposits & Withdrawals
Is Forex trading a CFD?
Forex trading is not CFD trading per se, but there are CFDs available to trade on currency pairs provided by CFD Forex brokers.
Why is CFD illegal?
CFD trading is legal in most parts of the world, with the US and Canada being an exception, where outdated regulation does not permit OTC products that do not pass through a regulated exchange.
How do you trade CFDs in Forex trading?
You need to have a funded account with a CFD Forex broker and trading knowledge with experience.
How do brokers make money on CFDs?
CFD brokers primarily earn money from spreads, commissions, and swap rates on leveraged overnight positions. As market makers, they also profit from client losses where they are the direct counterparty.