The CFD market is a bit confusing. It is relatively new and was criticized for many years due to poor regulation and a low level of reliability. In the past, CFD brokers were often being accused of trading against their clients and taking advantage of the basic rule of the conflict of interest between the investor and the broker. However, while this was somewhat true for many years, the situation is quite different now.
Many of these brokerage firms are heavily regulated now and must disclose the trading terms with their clients. And, like any other type of trading or investment, there are pros and cons to trading with a CFD broker. This type of trading is normally suited for certain needs such as high leverage trading and access to a variety of assets on one platform. In other cases, you might consider these platforms for the purpose of trading a particular asset that cannot be found on other platforms – much like in the case of Saudi Aramco stock or shorting GameStop stock (via Capital.com).
But, before you even consider trading with a CFD broker, you must know what you are getting into.
In simple terms, what is CFD trading?
CFD trading is simply a derivative market in which a trader enters a transaction versus the brokerage firm. It does not necessarily mean that the investor bets directly against the broker but more accurately, the broker is responsible for paying the profits made by the client and the trader will pay the broker if there’s a loss in a position. Simply put, instead of trading against other trades as happens in the stock and commodity exchanges, you trade against one provider. As a consequence, the broker has the option to provide high leverage and low trading commission. At the same time, this increases the risk of losing the capital, and therefore, most traders usually lose money when they trade with a CFD broker.
What’s the difference between trading CFDs and trading assets via exchange
So, there are some significant differences between trading CFDs and buying and selling assets directly on exchanges. These include:
- The main difference is the fact that when you buy CFDs, you do not actually own the asset, which means it is a sort of virtual market. You are entitled to dividends (though some CFD brokers do pay dividends for shares held in an account) and you do not get a share in the company, nor a possession on an asset like a commodity or currency pair.
- With CFDs – you get a higher leverage ratio that ranges from 2:1 to 1000:1 in some cases. This can be a double-edged sword as it increases the risk and the potential to make high revenues.
- CFD platforms are typically really good and easy to use. However, you’ll not get access to level 2&3 trading that is much more beneficial for day and swing trading.
- CFDs enable investors to easily take a short position compared to banks and investment firms.
Best 5 CFD Brokers 2021
Obviously, there are plenty of factors to take into consideration when we analyze CFD brokers. Ultimately, it is your choice to decide whether CFDs platforms are good or bad for you. Still, these are some of the most trusted and rich platforms in terms of regulation, client base, trading platforms, and the range of assets.
|Capital.com||FCA, CySEC||Fast order execution, low spreads, AI trading technology, top-notch trading platform||Visit Capital.com|
|eToro||FCA, CySEC, MiFID, AFSL, and ASIC||Social Trading||Visit eToro|
|IG Group||FCA, CFTC||CFD Stock Trading||Visit IG Group|
|AvaTrade||Central Bank of Ireland, ASIC, BVI, FSCA, FSA, ADGM, FRSA||Options and Cryptocurrency Trading, Good Selection of Trading Platforms||Visit AvaTrade|
|FPMarkets||ASIC||High Leverage||Visit FPMarkets|
Risk disclaimer: Over 80% of retail investor accounts lose money when trading CFDs