CFDs have become a popular choice for traders looking for short-term leveraged trading of stocks and other assets. In this expert guide, we will tell you what CFDs are and how CFD trading works. It also lists and compares all regulated CFD brokers on the market with a detailed review for readers who want all the facts before signing up. Compare all brokers to find one that meets your needs.
Popular CFD broker in Vietnam
What is a CFD?
Contracts for Difference (CFDs) are tradable products that mirror the underlying assets. When trading CFDs, you enter into a contract to buy (or sell) against your margin and collect (or pay) the difference when your position is closed. Unlike buying a stock or futures contract, CFDs are derivatives and do not own the underlying asset during the transaction. CFDs can be made to reflect almost any financial product or market, including individual stocks, indices, currency pairs, interest products or bonds. If it is moving and in demand, you can check if there is a CFD.
CFDs are generally not recommended for new traders. If you read the paragraph above and need to provide Google with some of the terminology used, you should not trade CFDs yet. Understanding or use of, the returns, counterparty risks and complexity of derivatives are encouraged. In general, CFDs are very volatile and are liable for extra losses, so you only have to trade what you want to lose. It is recommended to set up a demo account and experiment with it, but research and learn about the product and its content before depositing real money into the account.
How to trade CFDs?
The CFD trading mechanism works in a similar way to buying and selling stocks, futures or forex. With CFDs, you don’t actually own any of the underlying financial instruments. A trade is the difference in price between when you start a trade and when you end it. So the name is Contract for Difference. Most CFD providers will have to enter or exit positions on the spread. Let’s look at a commercial example for clarity.
Believing that the price will rise in the short term, we want to buy 100 “shares” from company XYZ.
Current price is $10.55, bid is $10.50 and offer is $10.60.
- Click buy via spread and pay $10.60 for 100 Weeks.
- If you had bought the stock itself, you would have used $53 margin for the position instead of $1050 + commission (assuming 5% margin).
- The stock goes to the $11 target, which it decided to sell quickly.
- Clicking SELL on the spread will fill $10.95 for 100 shares on the net.
Congratulations! You made a profit of $35 (35c per 100 shares x 100) on your position.
As you can see, leverage is powerful. At $53 (66%), a $35 profit is a much higher ROI than the 4-5% gain you get when buying a platform, even if the total is a bit less.
This is the charm of leverage and CFDs. Of course the opposite is also possible. The equivalent action can erase all capital (and more) in a CFD account.
Why should I trade CFDs?
CFDs are a leveraged product that offers significant advantages and disadvantages over conventional stocks or futures.
Advantages:
- Inference: For profit, CFDs are often used by traders who want to trade short or day trade. Depending on your broker’s margin requirements and your fee structure, an overnight stay can be expensive.
- Leverage: The amount of leverage available varies from broker to broker, product and market. The biggest advantage is the potential ROI that traders can get using CFDs when compared to conventional stocks. As you can see from the example above, it is easy to earn more than 50% ROI on margin used and it is very attractive to speculators who are used to risk.
- Profit: CFD brokers only require 2% to 20% margin on their current position, depending on equipment and volatility. Like forex, this gives access to expensive stocks that are not tradable or traded on a larger scale than non-tradable. For example, to buy 100 shares for $145 at Apple, you need $14500 and a fee in a stock account. With a CFD broker, you can trade 100 shares with a margin of $725 and 10 shares for $72.50. This opens up new markets and opportunities.
- Global Market Exposure: Most CFD providers offer multiple markets. You can trade Vietnam’s DAX as easily as Australian stocks. This can be done with an account without expensive data or operational costs.
- Fees: Especially with retail brokers, transaction fees can add up very quickly. There are no fees for CFDs, only spreads (indicate your own challenges).
- Hedging: CFDs offer stock portfolio holders the opportunity to hedge long stock positions quickly and inexpensively. Options can be tricky and difficult to structure, especially when used to hedge a position. CFDs offer savvy traders an affordable alternative and a wide range of hedging opportunities.
Cons:
- Uses: This is a double-edged sword. With CFDs, it is much cheaper to buy 100 shares at Apple, but doing so exposes you to considerable risk. If you move the platform a bit, your ideal position value will disappear and you can stay in the red with your broker.
- Cross: You need to cross the spread to start or end a CFD position. There is no order limit. This means you always pay a fee to enter or leave. Price paid to access the margin. While this may seem inconsequential, the spread can add a significant amount of money, especially if traders are active. It is also very difficult to implement some strategies (e.g. scaling).
- Betting for Brokers: A CFD is a contract with a broker. They profit if you lose. This gives rise to many conflicts of interest. It is very important to research the broker, make sure it is regulated (not much) and read reviews online. Please contact us directly if you have any questions before depositing funds into your account.
Partner risk
When trading CFDs, it is necessary to contract with a broker for the future movement of financial products. Unlike an underlying agreement, the other party to the agreement is a broker. As you know, this creates some conflict of interest problems and regulators continue to try to balance their clients from predatory practices and allow traders the freedom to trade those what they want.
Skeptics might argue that trading CFDs with brokers is like gambling at a casino. Being a happy and smiling customer is the casino’s biggest concern.
The believers claim that getting longevity from their clients is in the interest of the CFD broker and that they are making enough money from the spreads and volumes that the client has no incentive to go wrong. Shady practices have been reported to regulators, which will ultimately hurt business and profits.
It is worth mentioning that traders must conduct research on brokers and their CFD regulation. A good place to start is with a list of recommended brokers.
Broker comparison method
- Margin / commission
- Use and deposit requirements
- Exchanges
- Deposit and Withdrawal Options
- Additional Features
- Regulations
- Mobile Application
Each section is described in detail below.
Spread or commission
Spreads or commissions affect all traders and all trades. Represents the ‘cost’ of making a transaction. Therefore, it is important to compare one broker with another. But direct comparison may not be straightforward. Margins vary from asset to asset and can change on a daily basis if the asset is temporary. As a result, a broker may have the smallest spreads for a forex pair, but can have the largest spreads for an index, and the figures may change the next day.
Depending on the asset, the broker is the cheapest or the most expensive. Therefore, when comparing spreads with brokers , check the spreads of the assets you will trade the most .
Use and margin
Margin refers to the funds that a trader must deposit (and commit) to initiate trading. So, a deal worth £1,000 for the GBP/USD currency pair would open only £500,000. The trader has risked £1,000 worth of but that trade (the risk of total investment loss is very small, but that’s the value of the position) – hence the warning that accompanies CFD trading may exceed initial deposit . . Profit is also known as “leverage”. In this case, leverage is usually expressed in multiples, so 200:1 represents 200 times leverage in deposit. amplitude equivalent is 0.5%. Therefore, when comparing brokers, low margins require less deposit. This is important for some traders but less important for others.
Exchange
The trading platform can be roughly the same. If a trader finds it difficult to use a particular platform, this could be a mistake. Yes, most platforms have similar features but may differ in terms of usability and interface, and some may not be suitable for all traders.
It is important that trading software is familiar and easy to use. The trading platform doesn’t match the price for whatever reason, so traders can miss the price or make worse mistakes. The trade button may be very obvious to some users, but if you are a trader who accidentally initiates a large trade, you may want to choose a broker based on the clarity of the platform. All offer demo accounts of the brands listed here – try before you buy .
Deposit and Withdrawal Options
This is becoming less important as brokers add more and more payment methods. However, the list of withdrawal methods is limited, so if you are having trouble making money from payouts or brokers, you know how important that method is. Please check first.
Features (charts, technical analysis, research)
If you want to investigate a trade through a broker or software, you want to use the best research tools. Charting standards vary widely. Some brokers (especially ETX Capital) offer the best charting capabilities with a wide range of technical analysis tools that will satisfy even the most ardent technical analyst. However, some brokers claim that traders don’t do their research or do it elsewhere. Their tools lag behind the competition. Again, check your demo account to make sure your broker provides the required standards.
Other factors
Other factors that allow new traders to compare CFD brokers are the quality and availability of mobile trading applications. For many traders, mobile trading will be very important. Others will be happy not to use the mobile app.
Regulation should be a core criterion for all brokers. This page only covers regulated CFD brokers. This has fewer comparator factors than prerequisites.
Bonuses can sometimes rock traders. Terms and conditions are always important in the award agreement. They can often overwhelm new customers. But if used properly, rewards can be useful as it means trading for more money or trading without the two risks. Short term bonuses will not make up for expensive spreads in the long run.
Our review covers all the essentials to compare CFD brokers and as mentioned before, every CFD broker listed on the page offers a demo account. This allows traders to take the time to read detailed reviews and try out the platform itself before choosing. After you have all the information, you can decide which CFD broker is best for you.
Find the best CFD broker
Use these steps to make an informed decision about which broker is best for you and your unique investment style.
- Consider your trading style. For example, what assets do you trade and how often? Size of each trade, overall trading goal, etc.
- Choose a CFD Broker that suits your trading style and strategy
- Take advantage of demo accounts. Compare each trading platform you list.
- Make the best choice after using and trading on each platform.
- Deposit and trade for real money
Remember: Traders can use multiple brokerage accounts and use the accounts with the best terms for a particular trade or asset. Trade gold with one company, US stocks with another. Use an account that offers the best deal for a particular deal.