When comparing CFD brokers here are the main things you need to look at:
- The size of the CFD spread
- The margin available (leverage)
- What markets can you trade
- Is the CFD broker regulated
- What are the overnight financing rates
- Do you need DMA trading
Why is the size of a CFD spread so important?
When comparing CFD trading brokers the cost of actually executing a trade is clearly one of the most important factors.
The tighter the spread the better. As this reflects what your trading costs are. The spread is usually a fixed amount per shares and for things like Forex and Index trading and is comparible to a percentage.
For example the spread on Vodafone shares may be 0.25% from the actual price and this represents a commission of 0.25% on the value of the trade.
What is DMA and how does it differ from OTC CFD trading
For normal trading brokers charge a commission, but for CFD trading the commission is included in the spread. Unless you are trading DMA. DMA means direct market access and your orders sit directly on the exchange. You therefor get a clean price and your commission is added afterwards.
What is CFD margin and why is it important?
CFD trading margin is the deposit you have to have in your account to put on a trade. It varies from broker to broker and the lower the margin requirements the more exposure you can have with the least funds on account.
You can compare CFD trading margin in our comparison tables here but beware the lower the margin, the more risky a trade. As you are leveraging your money sometimes up to 500 times. So if you have £1,000 on account you could have £500,000 of exposure.
If a price moves 10% you have lost £50k meaning you owe the broker £49k. Many brokers now are introducing no negative equity protection which means that you can never lose more than your account balance.
Of course, this means that the leverage on offer will be reduced.
What markets can you trade?
This basically means how much access does your broker provide. The more the better really as you want flexibility when trading to give you as many opportunities as possible.
Make sure your CFD trading broker is FCA regulated.
Never go with a broker that is not fully authorised and regulated by the FCA or some of your funds are not covered by the FSCS scheme.
Most client funds are segregated now, but basically if your broker goes bust the Government will cover your deposit losses up to a certain point. You can view more information on the FSCS website here.
Check the overnight financing costs.
Some say these are hidden CFD charges as most traders don’t notice them or even have any idea what they are being charged.
You can read our blog post on how important are overnight financing charges for CFD trading here.
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- The best way to compare CFD trading platforms
- Top CFD trading strategies highlighted
- CFD trading tips and where to find them
- Where to find a CFD stock broker and what to avoid