Forex brokers now offer a wide variety of assets from different asset classes.
How to Choose a CFD Broker
These assets are offered as Contract-for-Difference assets or CFDs. This is a contract between a dealer and a trader to settle the difference between the entry price at the time of contract commencement, and the exit price on contract expiration, without physical exchange of the underlying asset in question.
To put it in another way, a CFD is a trade contract based on an underlying asset between a buyer and a seller, in which both agree that the price differential of the asset between the start and end of the trade contract will be paid by one party to the other.
The physical asset is not owned or exchanged by any of the two parties.
The fact that there is no physical ownership or exchange of the physical asset between both parties makes this form of trading easy to offer on trading platforms, following the same principles of online forex trading where the traders do not physically exchange the currencies being traded. Also, traders can go long or short on the CFD, enabling profits to be made with long orders on rising prices, and short orders on falling prices.
What assets are traded as CFDs?
Unlike a decade ago when CFDs were restricted to stocks and a few indices, it is now possible to trade a wide variety of assets as CFDs.
The CFD forex brokers in our list offer the following asset classes as CFDs:
- Commodities (metals, energies, softs)
- Interest rates
Types of CFD brokers
Just like in the forex market, there are two types of CFD forex brokers. We have the market makers, who operate a dealing desk and offer CFD trading in-house, and we have the direct market access providers, who pool pricing from several liquidity providers and offer same to their clients without passing these through a dealing desk.
There are also hybrid brokers, who offer both models to different categories of clients.
Dealing desk brokers operate in two ways.
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For a majority of clients, pricing and order fulfilment is done at the dealing desk, where wholesale positions obtained from the interbank market are chopped down into smaller bits that their clients can trade. Orders which are too large or which may constitute counterparty risk are sent to the interbank market.
Direct market access (DMA) brokers deal with clients who have wholesale capacity. As the interbank market requires large volume trades, only clients with the financial muscle to operate at this level are taken.
Pricing is aggregated from several providers and routed to the trader, who selects a set of bid-ask prices and place orders based on these prices.
How To Choose Your CFD Broker
Orders are then sent to the interbank market, or to other prime brokers who can perform fulfilment.
Criteria for choosing a CFD broker
In selecting the CFD brokers listed on this site, certain criteria were used. The ultimate aim was to present brokers that would guarantee CFD traders the best possible deals with great user experience.
Factors used in the determination of the best CFD forex brokers include: regulation, trading software type, types of accounts provided (with features) and contract specifications (commissions and spreads).
A) Regulatory Status
Regulation is a key factor in consumer protection.
It ensures that there are laid down rules by which brokers must abide, for the safety of their clients. Regulatory protocols are enforced by the regulatory agencies.
If anything goes wrong, relief or arbitration can be sought by the consumer.
Some of the requirements for running a CFD forex brokerage, as enforced by regulators are as follows:
- A physical location which can be accessed at any time.
- Qualified personnel, including a management team that can be identified.
- Financial reporting.
- Anti-money laundering procedures.
- Segregation of clients’ accounts, and in some jurisdictions, access to investor compensation insurance.
The CFD forex brokers in our list conform to these requirements and this list is updated regularly as new information on regulation becomes available.
B) CFD Trading Platforms
Many of the brokers in our list offer the MT4 and MT5, which have excellent facilities for CFD trading.
Indeed, the MT4 has become the mainstay of CFD trading in the retail segment of the market, as it has great asset listings, and charting/analytical tools to enable multi-asset technical analysis.
C) CFD Account Types
No two traders are created the same.
That is why compartmentalization of traders using an account differentiation system is gradually becoming the norm. Creating separate accounts for beginners, advanced traders or professional level traders ensures that each category of traders are provided with tools they can work with, suitable for their level of expertise.
The needs of advanced traders will differ greatly from those of beginners, so it is vital to provide accounts that meet the demands of each trader class.
D) Contract Specifications
In terms of contract specifications, it is important for traders to know the conditions under which a CFD asset is traded. Trading an ETF CFD is not the same as trading a CFD on crude oil.
What assets are traded as CFDs?
In the same vein, what a trader pays in commissions or spreads on a crypto CFD will be different from what the trader will pay when trading the Nasdaq100 Index CFD. Therefore, the best CFD forex brokers will ensure that their clients know clearly what they are getting into whenever they decide to trade a particular asset.
It must also be mentioned that some brokers will charge commissions and spreads on certain CFDs, while others may only charge spreads. The only way for a trader to get this information is for a broker to spell out the conditions of trading on each asset very clearly.
This is usually done using a contract specifications table on the individual broker websites.
The contract specifications include information on the following:
- Minimum order: It is pertinent to know if you can trade micro-lots on particularly volatile assets, or whether you can only place a minimum of 0.1 lots.
- Leverage/margin requirement: What is the leverage/margin requirement for every CFD traded on a CFD forex platform?
- Commission: Are there commissions to be paid?
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If yes, how much?
- Tick size and increment: How many points is one tick worth, and by how many ticks/points does an asset fluctuate?
- Trading hours: When is an asset open for trading?
- Expiration of contract: Are contracts continuous, or do they expire?
If they expire, what is the expiration period: one month or three months?
For currency pairs, each metric is probably the same from one currency to another. But for CFDs which cover several asset classes, the information will be totally different from one asset class to another. As a trader, access to this information is absolutely crucial to be able to plan your trades and risk management strategies.
All the CFD forex brokers in our list have pages with contract specification tables that clearly spell out what you can expect to encounter when you trade a CFD asset.