FxBrokerReviews.org – CFD trading is a popular way to enter the world of trading. CFD stands for Contracts for Difference and is a great way to enrich your strategies for trading. As the name suggests it is a contract between the buyer and seller in which the buyer is entitled to pay the seller the difference between the current value of an asset and the value it held at the time of the contract.
CFD is all the more popular amongst experienced traders as you don’t have to own the thing that you are trading. You just have to speculate on either the rise or the fall of the underlying asset. The way CFD works can be rather tempting, but the chances of a magnifying loss are also high. Therefore, if you are a beginner it is recommended to stick to the best CFD forex broker and not take any hasty decisions.
This article will help you find out more about CFD trading, the best online trading platforms for you, and whether or not CFD is the right thing for you!
What is CFD Trading?
Before we dive into the technical know-how let us get a better understanding of CFDs.
CFDs enable traders to speculate on various financial instruments such as shares, indices, commodities, and even forex without having to buy the underlying asset. So you buy or sell the CFD instead of the asset. As it is a contract so the buyer agrees to pay the difference in the price of the asset from the time at which the contract is opened to when it is closed to the seller. CFDs allow traders to trade on margins which means less financial commitment from your side.
Advantages of CFD trading
With access to a huge range of markets, leverage, and flexible short trades, CFDs have become a popular investment choice. Let us take a look at the benefits of trading CFD that will help you make your decision;
- Variety of trading options
The best feature of trading CFDs is that it allows you to trade a variety of instruments like stocks, indices, futures and options, and more without actually owning the asset.
Plus, all the best trading platform for beginners support almost all the markets so switching from indices to stocks is just a click away.
- The flexibility of day trading
While day trading, certain markets require traders to have a minimum capital to place limits on the number of day trades that can be made within certain accounts. But if you trade with CFD all traders can day trade without any restrictions. If you want to start day trading, learn here about the best day trading platforms.
- Provides leverage
CFD trading allows traders to keep their capital through leverage. Leverage enables you to open a position without having to pay for its total value. You just have to give a minimum deposit known as a margin.
It is essential to keep in mind that high leverage can sometimes magnify your losses with even a slight move in the prices.
- Allows hedging
Unlike other market instruments CFDs can be shorted at any time without borrowing costs as the trader doesn’t own the underlying asset. It comes as a useful way of minimizing the risk of negative moves in your investment portfolio.
Disadvantages of CFD trading
Everything comes with a list of pros and cons, let us check out a few disadvantages that traders may face will trading CFDs.
- Weak regulations
If you are a forex trader, you might know the importance of trading in a regulated market. Unfortunately, the CFD market is not highly regulated. The best you can do to protect yourself is to choose a broker that is reliable and well-experienced. The best CFD forex broker is the one that understands your trading needs and also has a good stand in the market.
- Risk with leverage
While leverage exposes you to greater profits it also leads you toward potential losses. If there’s a market closure or a sharp price movement there are chances that you may lose more than you had invested. Execution risks also may occur due to lags in trades.
- Spread costs
Often the profits of CFD trades are cut as they have to pay for the spreads. Traders have to pay the spread on entries and exits which reduces the potential to earn profit from small moves. The spread also decreases profits by a small amount compared to the underlying security and hence increases the chance of losses by a small amount.
How do CFD works?
Now that you know what a CFD is let us get to the working of the financial instrument.
As mentioned above it is an agreement between the buyer and the seller in which the buyer agrees to pay the difference in the value of the asset from the time the contract is opened and lasts till it closes. Each contract has a sell and buys price, which is lower or higher than the current market price. Investors can place their bets about the rise and fall of the asset and if the purchased CFD shows a rise they will offer a sale. The difference between the sell and buy prices is called the spread, and it shows how much it will cost you to make the trade.
There are no set expiration dates for CDFs so to close the trade you have to open a trade in the opposite way you started it. The best way to get a better understanding of CFD trading is by using the tools and the technical analysis provided by some of the best online trading platforms.
What are the top CFD trading platforms?
The best CFD forex broker is the one that provides the highest standard of security and protection. Moreover, the online trading platform should fulfill your trading needs and help you get returns. Check out some of the best CFD trading platforms:
- PLUS 500
The trading platform has more than 2000 CFD contracts and stands in the list of the best online trading platforms when it comes to ease of use and navigation. Beginners can take advantage of the demo account if they are unsure of the capital they want to invest. The platform also has a 24×7 customer support service to solve trader grievances and issues. With low trading costs and decent leverage Plus 500 comes out as a popular choice amongst all kinds of traders.
- Lowest deposit of $100 minimum deposit requirement.
- The platform provides 24/7 customer service.
- Plus 500 charges zero commission from all trades
- The profits are generated with the help of spreads
- The platform offers a limited product portfolio.
- It also lacks quality educational and research materials.
2. Fineco Bank
It is a platform with zero commissions and also offers tight spreads. You can trade a wide range of financial products and CFDs using your mobile, desktop, or even the web. The platform is regulated by the Bank of Italy as well as the Prudential Regulation Authority and the Financial Conduct Authority, making it a reliable broker.
The only thing to be aware of is the overnight costs that it might charge.
- It charges zero inactivity fees
- Has a wide range of portfolio management tools
- The mobile app makes it easy to track performance
- The platform supports advanced fundamental analysis.
- It charges an annual management fee
- Not the best platform for beginner traders.
NAGA is a multi-trade platform with access to various stocks, commodities, EFTs, and a wide range of CFDs to trade from. The trading platform has emerged to be a popular investment platform with a major emphasis on social networks and an active community of users. The various tutorials, videos, and guides can give a niche introduction on how to trade commodities online to all kinds of traders.
- The platform has huge product offerings
- Provides support in multiple languages
- It does not charge any deposit fee
- Provides personal trading assistant
- Charges account withdrawal fees
- Does not provide copy trading for demo accounts
Etoro has made its way to emerge as the best trading platform for beginners. It offers trading at a low fee with no commission charge and the platform is free for all traders. The CFDs on eToro have a lot of features and risk management tools such as real-time alerts and customizable stop loss.
- The platform has a Quick and easy process to open accounts
- It has an extensive social trading network
- Offers a small minimum deposit
- Beginners can avail of the option of a free demo account
- The platform is only available in USD so a conversion fee is charged
- It lacks education resources
It is a highly trusted platform for CFD trading and it is also one of the largest platforms for trading. The platform has an excellent range of educational resources specially catering to CFDs. IG has more than 17000 financial instruments to trade from. The platform is also considered the best stock trading platform.
- IG does not charge any withdrawal fees.
- Has an extensive range of financial instruments to trade from
- Provides excellent customer support
- Considered the best stock trading platform
- It charges high stock CFD fees
In which countries you can trade CFDs?
CFD trading is restricted in the US. The U.S. Securities and Exchange Commission (SEC) does not allow the trading of CFDs. While other parts of the world like the UK, Germany, Australia, Canada, New Zealand, and some parts of Asia offer CFD trading to all its traders. Most of the Euro Zone allows traders to buy and sell CFDs. Hongkong and US do not allow CFD trading even under regulations.
Why is CFD banned in the US?
The reason why CFD trading is not allowed in the US is that it is considered to be an over-the-counter (OTC) product. An OTC means that the product does not come under the regulations of the exchange.
Also, CFD allows traders to use leverage which may expose heavy losses to traders at times. Therefore, the authorities have restricted the trade of CFDs in the US.
Is it safe to trade CFDs?
Yes, CFD trading is safe as well as legal. Like all other market instruments CFDs are also prone to risks. An investor has to understand the potential risk of trading CFDs and avoid taking hasty decisions. While no one authority especially regulates CFDs, you should make sure that the broker you choose should be regulated. Visit forex broker reviews to get a list of the best-regulated brokers in the UK.
Can you make profits with CFDs?
Yes, a trader can get good returns with CFDs. the biggest advantage of CFDs is that a trader does not have to own the underlying asset. You just have to speculate on the rise or fall of the prices of the assets. However, if you are inexperienced then it is best to learn trading strategies and tools before you start trading.
Learn the most profitable trading strategies from the best day trading platform today.
Is CFD trading good for beginners?
CFDs can prove to be a little complicated for inexperienced traders. They seem tempting and come across as a great investment to get high returns. But it becomes crucial to understand the market before you make any trade decisions. If beginners want to trade in CFDs start with small amounts and do not aim for higher profits at once. We advise you to learn all the fundamental skills and market trends before you trade in CFDs.
CFDs are a great investment opportunity for all traders. Various brokers serve as the best online trading platform for CFD trading.
If you are looking for a free and easy-to-use trading platform then Etoro and Plus 500 are your go-to options. But if you are an experienced trader looking for technical tools and features then you should consider NAGA and Fineco Bank. IG overall stands as the best broker in all aspects.