Introduced to the market during the 1990s, CFD trading is an increasingly popular derivative within the retail sector. It is very similar in principle to spread betting but is more accessible globally, mainly due to the stigma attached to the word betting in some countries.
Top 5 CFD Brokers
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Although it hasn’t been around for as long as some CFD brokers, Intertrader has grown to be one of the market leaders. We love the fact that it gives monthly cashback to its clients worth 10% of their spread costs the month before. Nobody else on the market does this. You would think that this might be to make up for them charging high fees in the first place but this isn’t the case. Spreads are as low as 0.8% on currencies and 1 point on equities.
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IG is one of the longest providers of derivative instruments to the retail markets. It began offering spread betting in 1974 and was a pioneer in this field. CFDs were offered at a later stage in 2002 and it developed into the market leader on Contracts For Differences in both the UK and Australia. IG is listed on the London Stock exchange and is authorised and regulated by the Financial Services Authority.
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ETX Capital begin its life as TradIndex and rebranded to ETX Capital in 2008. It’s core product is spread betting although it offers a high quality CFD brokerage too. It won he ‘Best Value for Money’ award from the Investment Trends July 2011 UK CFD and Financial spread betting Report and is also praised for offering a fist rate, high speed trading platform.
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Spread Co is a London based provider of both spread betting services and CFD trading. It was founded in 2006 by former CEO of CMC Markets, Ajay Pabari. Since it began trading, Spread Co quickly became one of the leading providers of financial derivates and has authorised and regulated by the Financial Services Authority (FSA) since October 2006
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One of our favourite CFD providers is City Index – a company that has been involved with providing spread betting since 1983 and CFDs since 2001. It currently offers a massive 9884 tradable markets and a mobile trading app that has won numerous awards, including:
- Financial Times and Investors Chronicle Award for ‘Innovation of the Year (Mobile)’ (2010).
- Money AM ‘Best Mobile Trading Platform’ (2010 and 2011).
- Shares Magazine ‘Best Online Trading Application’ Award (2011).
City Index’s spreads are extremely tight, especially on indices – FTSE 100 and Wall Street can be traded from just 1 point.
What are Contracts For Differences?
A Contract For Difference is simply an agreement between two parties where one pays the other the difference between the current price of an asset and its price at a specified time in the future. One of the similarities with spread betting is that although there is an expiry date of the contract, it can be closed by early by either party – the private trader or CFD broker. A broker will normally only close a contract if the trader has exceeded its minimum margin requirement and doesn’t have the funds to cover the trade.
The benefits of CFDs over more traditional methods of investing are numerous. We will discuss each of these in turn:
Minimal margin requirements
CFD brokers, like spread betting companies, offer their clients the ability to trade using leverage. When they open contracts, the trader is only required to fund a small percentage of the contract’s value in the form of a deposit. Being able to trade on margin means the trader can open positions that are worth considerably more than their account balance meaning resulting in larger gains.
Although it is a highly beneficial aspect of the CFD, trading with leverage is particularly risky and should be headed with caution. This is why we would advise anyone starting out in CFDs to begin by opening a demo account first to familiarise themselves with how it effects trades and also the risk management tools that can be used to offset this risk. Most of the leading brokers will offer a practice account and they are free to open.
The number of different tradable markets within a CFD account is simply breath-taking. Most brokers will provide access to the following and more:
- Individual stocks and shares
- Interest rates
- Market sectors
Trade on rising or falling markets
When you use share dealing services or brokers to buy other assets, you can only benefit from price rising. This doesn’t help you during bear raids. With Contracts For Difference you can both ‘buy’ and ‘sell’ meaning if you think an asset price is going to fall, you can go short and gain from that fall if it were to happen.
If you are trading from within the UK you will also benefit from foregoing stamp duty on any trades. This is handy if you regularly invest into company’s stock as it will cave you 0.5% of the total trade’s value. You will be liable for other forms of tax though so if you are based in the UK then you might want to consider spread betting as an alternative.
Although it can be beneficial to trade CFDs or even use them as an investment vehicle, they are harder for the novice investor to pick up and get into. There are a number of differences to the more traditional methods of investment although if used carefully, they are extremely beneficial.
If you are considering trading CFDs but have never dealt with derivatives before it would be in your best interests to open a practice account to learn the how they work before risking real money.