CFD brokers are generally known for their specialty in offering tradable assets from various markets. How to find a good CFD broker to diversify your portfolio?
CFD brokers enable investors to diversify their portfolios as they offer a wide selection of financial instruments. What's more, CFD brokers allow you to control large positions even though you have a small capital. In this article, we will discuss the advantages and disadvantages of CFD brokers as well as the criteria of reliable CFD brokers.
- Why Should You Switch to CFD Brokers?
- What Aspects Should Be Considered When Choosing CFD Brokers?
- How CFD Brokers Make Money
- Reliable CFD Brokers to Choose
- What Are the Drawback of Switching to CFD Brokers?
- Final Words
Why Should You Switch to CFD Brokers?
CFD brokers facilitate multi-instrument trades for their clients. With a wide range of investment products comes a wide range of opportunities for you to take advantage of. Let's take a look at some of the benefits of switching to CFD brokers.
Diversification is a risk management strategy where the investment is spread out across different financial instruments. Traders who commit themselves to a single asset class are at risk of blowing up their investment when the market suddenly moves against their positions.
In the same fashion, you can also protect your portfolio by hedging your trades. Hedging involves opening an opposite position in a related asset to offset potential losses. For example, you can open a sell order to hedge against losses in a buying position. This way, a win in the sell order will offset the loss should the price of the asset goes down. It is true, though, that hedging will also reduce your potential profits. However, risk is an inseparable part of financial market and you should always manage it.
Tactical Asset Allocation
By signing up to CFD brokers, you will be able to actively adjust your portfolio's asset allocation. This dynamic investment strategy is also known as tactical asset allocation. Since financial instruments tend to have their own cycle, you can allocate your funds to CFD products that are currently performing well or avoid products that are in the mud. This strategy is only possible if you have access to a wide range of financial instruments across multiple asset classes. For example, when a recession hits, you may move from trading in high-risk assets to safe havens such as gold, the Japanese Yen, or the Swiss Franc.
In the financial market, buying power refers to the money available for investors to buy investment products. Your buying power is the capital you have in your trading account plus all available margins. CFD brokers typically provide leverage to their clients, basically giving you the ability to take on larger positions with smaller capital. It should be noted, however, that while leverage increases buying power and potential profits, it also amplifies the risks.
What Aspects Should Be Considered When Choosing CFD Brokers?
It is not a particularly easy task to choose the right CFD broker for you. Below we will provide some criteria for you in order to separate reliable brokers from unreliable ones.
Regulation is the first checklist for filtering out unreliable brokers. Unfortunately, scam brokers are still lurking and ready to prey on their next victims. They often promise big profits to attract unsuspecting investors. To avoid such practice, reputable regulators are actively ensuring fair business conducts and protecting their customers.
In theory, regulatory bodies seek to eliminate unethical trading practices, but we'd like to point out that not all of them are to be trusted. The Financial Conduct Authority (FCA) of the UK is one of the most reputable regulators out there. Brokers that are licensed by the FCA are known to be more trustworthy than the rest. Other regulators you can trust are the CTFC (US.), ASIC (Australia), IIROC (Canada), FSA (Japan), CySec (Cyprus), etc.
Platforms and Tools
Most CFD brokers provide their clients with the trader-favorite MetaTrader platform thanks to its usability and reliability. Brokers also tend to build their own proprietary platform for advanced traders. Flagship platforms like this become a necessity for today's brokers due to the ultra-competitive nature of CFD markets. These platforms usually offer benefits that may not be found in MetaTrader or even in their competitors'.
Other than the platform, trading tools are an aspect that should not be overlooked when you choose a broker. A wide selection of tools will give you various alternatives to approach the markets. Find out whether a broker has platforms and tools that can satisfy your trading needs and style by opening a demo account first.
Services and Education
Serious services mean serious business. CFD brokers that do not bother to serve their clients simply are not worthy of your money. When you are trading, you may encounter technical issues that require speedy and flawless assistance. Failure to do so on the broker's part may lead to your money vanishing. Legitimate CFD brokers will also want their clients to succeed. They will put educational resources for you to learn and improve your trading knowledge. This is particularly important for new traders who are still trying to figure out what is what.
Range of Financial Instruments
Although most CFD brokers are used by traders exclusively for one market or two, the core idea of CFD brokers is to offer its clients the opportunity to diversify their portfolios. For that reason, the range of tradable financial instruments is one of the most important aspects in choosing a CFD broker. Forex, indices, stocks, and commodities are commonly traded in CFD brokers, but it is your task to research how many assets are available in each instrument.
To some, transaction costs are perhaps the most decisive factor in picking a CFD broker. Assuming that you have shortlisted two brokers, and both are equal in terms of services, tools, or other aspects, the cheaper broker for sure is the definitive choice. Now, what if one broker is more expensive than the other but provides better services?
Let's say that Broker A offers a 1% fee while Broker B charges 2%. These numbers may appear to be low at the surface. However, you will feel the burden of the costs down the road as you trade more often and with larger positions. Higher costs mean smaller net profits and bigger net losses. Also, let's not fool ourselves here. We all know that the threat of losing trades is always looming. In short, it is wise to choose the cheaper alternative.
Also, make sure to read and understand all the costs of transacting with them, be it the commission, spread, or withdrawal fee, etc. All these costs will only keep piling up and may as well eat away your deposit. And it becomes increasingly difficult to regain your original deposit once you suffer losses after losses.
Ideally, you would want to sign up to a broker that can keep your trading costs low. That said, non-transparent brokers are not unheard of. Do extensive research to find out whether there are hidden costs and how the payments are structured.
How CFD Brokers Make Money
We have talked about transaction costs, and these costs are some of the brokers' sources of income in exchange for providing their trading services to traders. The costs come in several forms with distinctive calculation methods.
Spreads are the differences between the bid (sell) price and the ask price (buy). CFD brokers primarily make money through spreads . For traders, a lower spread provides a better overall return for winning trades and minimizes the risk in case of unsuccessful trades. As competition gets fiercer, it is not uncommon for CFD brokers to tighten their spreads on trades.
For example, forex CFD for EUR/USD is quoted at 1.2448/1.2446. The bid price is 1.2448 and the ask price is 1.2446. This gives us a spread of 0.0002 or 2 pips which translates to a $20 cost for one standard lot. This is the amount that you directly pay to your broker when you open the trade regardless of the result.
CFD brokers could also charge you a commission, which is a percentage of the size of your transaction. However, this is a practice that many brokers have abandoned. That said, there is no such thing as trading without "commission". Traders are bound to pay their CFD brokers with fees such as spreads. Those that market themselves as commission-free brokers may actually afford to do so by widening their spreads. And if they don't, they have to be creative and find alternative ways to generate income.
Financing refers to the cost marked up by brokers that allows them to finance your trades. Financing is instrumental in attracting retail traders as it allows us to trade with leverage. Basically, leverage is a loan provided by brokers to enable traders to take larger positions. In return, brokers charge financing costs, usually an interest rate plus a small markup, to cover the cost of the leverage that you use.
Hedging is not only done by traders. This strategy is also implemented by CFD brokers to mitigate their losses by matching traders' positions and sending the remaining liability into a liquidity provider (market maker, the real market, etc). This way, brokers can protect themselves in case traders make profits.
Please be aware that some CFD brokers are market makers that also provide liquidity. Market makers with questionable or no regulations are more susceptible to unethical trading practices. They would happily trade against you and profit from your losses. Make sure to always verify a broker's regulation by checking the regulator's website.
See Also: The Hidden Truth of Forex Broker License
CFD brokers may also charge you various fees in regard to your registered account. Usually, they have nothing to do with your activity of buying and selling CFDs. Some of the non-trading fees include the following:
- Deposit fee: A fee when you put money into your account. It can be fixed and it can be a percentage of the total deposit.
- Withdrawal fee: It is the fee that you pay when you take money from your account. This fee will downsize your profit even more and it can be very high.
- Inactivity fee: When you do not engage in trading activities after a period of time, brokers may trigger an inactivity fee. It is introduced by brokers so that you will keep investing your money.
Reliable CFD Brokers to Choose
Considering all the criteria above, here are some of the best CFD brokers you can choose. Click on the Review button to learn more about the brokers.
Trading by telephone
Islamic accounts available
Pepperstone was founded in 2010 by a team of experienced traders with a shared commitment to improve the world of online trading. Based in Melbourne, Australia, they grew to become one of the largest forex brokers in the world. If traders want to find a broker that provides low spreads, fast execution, and award-winning support, then the answer is Pepperstone.
Pepperstone has a strong legality guarantee because it has been licensed by the Australian regulator ASIC and FCA. Traders' funds can be deposited in segregated accounts at top Australian banks, one of which is the National Australia Bank (NAB). Therefore, the safety of funds is not a concern if a trader chooses to open an account in Pepperstone .
They succeeded in collaborating with 23 top banks to bring Bid to investors instantly via optical fiber. This allows all orders to be executed 100 percent automatically with low latency up to 0.05 milliseconds, without dealing desk intervention and requotes, as well as with super low trading costs.
Trusted by over 73,000 traders around the world, Pepperstone processes an average of USD12.55 billion of trading volumes every day. Because of that, they have many awards such as:
- The Best Global Forex ECN Broker 2019 and Best Forex Trading Support-Europe
- Best Australian Broker and Best Trading Platform 2018 by Compareforexbrokers.com
- Best Forex ECN Broker, Best Forex Trading Support, and Best Forex Trading Conditions by UK Forex Awards 2018
With the many rewards gained, Pepperstone hopes to attract more and more traders from all over the world. The rising performance of Pepperstone is not only due to the super-tight spreads and fast execution that it provides, but also because many traders are interested in trading with deposits in currencies other than US Dollars.
For this reason, Pepperstone is one of the most market-responsive brokers because it is willing to accept deposits in 10 currencies, which include AUD, USD, EUR, CAD, GBP, CHF, JPY, NZD, SGD, and HKD.
Trading in Pepperstone would allow traders to choose between 11 trading platforms: MT4 for desktop, MT4 Mac, MT4 iPhone, MT4 Android, MT4 iPad/Tablet, MT5, WebTrader, cTrader WebTrader, cTrader cAlgo, and cTrader Mobile. The choice of trading platforms may seem confusing to novice traders, but actually, it is very useful because it has fast execution.
When trading forex, traders can enjoy raw spreads from 0.0 pips on Razor accounts, over 61 currency pairs, and commission-free account funding on a wide range of deposit options. In addition to currency pairs, Pepperstone provides many types of trading instruments, including CFDs for indices and shares, commodities, and cryptocurrencies.
Instruments in commodity trading are pretty much diversified. Not only metal, gold, and silver, but traders can also trade with soft commodities such as cotton, sugar, coffee, cocoa, and orange juice. Pepperstone also provides trading on energy (oil and gas).
There are two types of accounts provided by Pepperstone, namely Razor accounts, and Standard accounts. If you area beginner, it is recommended to choose a Standard account with an average EUR/USD spread of 1.0-1.3 pips and free commission.
Those with particular trading styles such as scalpers and algorithmic traders may enjoy the lower cost setup traditionally seen in a Razor account, with a commission from AUD7 round turn of 100k traded. The initial deposit starts at USD200 with a minimum lot of 0.01 (micro) and 1:500 leverage.
As a Pepperstone client, a trader can fund and withdraw with alternative methods including Visa, Mastercard, POLi internet banking, bank transfer, BPay, PayPal, Neteller, Skrill, and Union Pay.
If you are new to trading or looking to practice your trading strategies in a risk-free environment, you can create Demo Account in Pepperstone. But if you are an experienced trader or prefer to learn by doing, Pepperstone provides a Live Account that allows you to trade with live executions and pricing.
Traders can also follow and copy strategies from popular traders using third-party services while learning how to improve their trading abilities. Pepperstone has partnered with a range of social trading platforms that traders can choose from, such as Myfxbook, ZuluTrade, Mirror Trader, MetaTrader signals, and Duplitrade.
Trading by telephone
CNMV (Spain), 40
Islamic accounts available
With more than 15 years of experience, XTB (rebranded from X-Trade since 2009) is one of the largest brokers in the world. They have offices in more than 10 countries, including Belize, UK, Poland, Germany, Spain, and France. XTB Group is regulated by the world's biggest supervision authorities including the IFSC, FCA, KNF, and CySEC.
As a regulated company, XTB holds all retail clients' funds in a fully segregated account, meaning they are not mixed with the broker's operational funds. This enables traders who register in XTB to trade with confidence in their funds' safety.
XTB tries to provide an easy-trading anytime and anywhere. They have a mobile application, xStation to realize that vision. Traders can access financial markets from their fingertips and choose from over 1,500 CFD markets including 48 currency pairs, cryptocurrencies, 20 indices, commodities (gold, oil, silver, etc.), stock, and 60 ETFs from around the world. This application can be downloaded in Google Play and App Store.
Traders also can access their platform by PC. XTB offers a web trade platform with access to more advanced tools for more advanced traders. It's fully compatible with Chrome, Firefox, Safari, and Opera web browser. Traders are provided with fast and reliable trade execution speeds. No wonder this platform has successfully presented XYB with awards such as Best Trading Platform 2016 by Online Personal Wealth Awards. Additionally, MetaTrader 4 is also available when trading in XTB .
XTB charges fees for forex, indices, and commodities trading. The amount of fees differ based on the types of accounts. For example, in Pro Accounts, traders have to pay a commission from $3.5 per lot for forex and a commission from 0.08% per lot for stock CFDs and ETF CFDs.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. When trading, clients have to prepare strategies. Based on XTB's data, 75% of retail investor accounts lose money when trading CFDs. Because of that, clients should consider their level of understanding of CFD trading and their affordability to take high risk.
Traders can increase knowledge by joining XTB's Trading Academy program. There is a vast array of content that's geared towards helping traders, including video tutorials, trading courses, articles, and much more. Traders can choose a topic from different levels of education and enhance their skills across the stages of the trading journey.
Furthermore, there are several ways to deposit funds in XTB, including bank transfer, credit cards (Mastercard, Maestro, Visa), as well as e-Wallets (Skrill, Paysafe, Neteller, and many more). But, some of these methods may incur additional charges. For example, when using Neteller methods, traders have to pay 1% of their deposited amount.
Traders can contact XTB's customer support that is available 24/7. They are ready to answer all of the traders' questions and solve the problems, whether by email, phone, or live chat.
Overall, XTB is recommended as an ideal broker with top-tier regulation and trading platforms. Its education feature is also worth joining in as many traders are still in the process of perfecting their consistency and continue to learn the dynamic change in the forex market.
Interest rate on funds
Trading by telephone
Islamic accounts available
Requires sending documents via postal mail
Established in 2009, XM is a member of an online brokerage company called Trading Point of Financial Instruments Ltd. In providing clients on a global scale, the company has branched into XM Australia and XM Global, and XM Cyprus. Each member has different headquarters and licenses, with XM Australia registered under the Australian Securities and Investment Commission (reference number: 443670), XM Global under the IFSC (60/354/TS/19), and XM Cyprus under the Cyprus Securities and Exchange Commission (reference number: 120/10).
XM is one of the more experienced brokers in the world of online forex trading today. Since its founding, the broker has experienced a lot of changes, including the addition of the Ultra-Low Account and Webinar feature that is accommodated in 19 different languages with 35 native instructors for each language.
In terms of trading instruments, XM is a well-known diverse class assets provider, varying from Forex, Commodities, Equity Indices in CFDs, Precious Metals, Energies, to Shares. XM prides itself to be the ideal broker in trading execution, offering a stat of 99.35% orders to be executed in less than 1 second. Trading in XM would be also provided with a strict no requotes policy, no virtual dealer plug-in, no rejection of orders, real-time market execution, and the choice for traders to place orders online or by phone.
Spreads on all majors can reach as low as 0.6 pips in Ultra-Low Account, while spreads on other accounts usually start from 1 pip. Instead of providing maximum leverage on the scale of 1:500 or 1:1000 (round numbers), XM chooses to limit their leverage on a 1:888 scale, a unique number that is now widely recognized as XM's trademark.
To protect the client's fund in the event of extreme volatility, XM presents each account type with Negative Balance Protection. The deposit starts from $5 in Micro and Standard Account, while Ultra-Low Account requires a minimum deposit of $50. Traders who open accounts in XM are enabled a condition similar to a Cent Account environment in the Micro Account, in which the Contract Size for every lot is only 1,000 units. If it is applied with the smallest lot size in the MetaTrader platform which amounts to 0.01, it means that traders can go as small as 10 units per trade.
For the deposit, XM applies zero-fee deposits in most of its available payment methods. Traders can choose to fund or withdraw their accounts via wire transfer, credit card, as well as the most favorable e-payment choices like Skrill, Neteller, and FasaPay.
XM also provides an Islamic Account for Muslim Traders obligated to Sharia Law that prohibits the use of interest generated by overnight swaps for each currency pairs. To give their clients the best experiment in trading, XM has given access to both MT4 and MT5 platforms, each is available for more than 6 display formats (PC, Mac, Multiterminal, WebTrader, iPad, iPhone, Android, and Android Tablet).
All in all, there is no doubt that XM has gone global with its deep commitment to providing trading services in more than 15 languages around the world. Aside from easing traders' experience with mainstream trading platforms and high-quality trading execution, XM is open to various types of traders, from small capital traders to the more experienced ones with big deposits at the ready. Traders are even provided with a Cent Trading environment should they choose to register under Micro Account.
What is the Drawback of Switching to CFD Brokers?
Despite their advantages, CFD brokers also carry a number of disadvantages with them. As a start, your account activation might not be as smooth as you expect. There are also risks that are not present in traditional brokers. Let's see some of the drawbacks of CFD brokers below:
Credit checks are the routines when you sign up to a broker. As you will loan money from a CFD broker in the form of leverage, the broker in turn will have to verify your legitimacy as a trader. Brokers can decline your registration if you do not meet their specific requirements. These processes can be particularly painstaking for traders who regularly switch from one broker to another.
Leverage is a two-edged sword, a silent killer. For example, you want to buy 100,000 units of EUR/USD. Since you only have $1,000 in your accounts, you have to use a leverage of 100:1. Let's say you end up losing the trade by 10 pips, which is $100 in real value. That's already 10% of your account gone. Therefore, it is very much wise to use leverage with caution.
Yes, you can hold CFD positions as long as you want providing that you extend the CFD deadline. This, however, comes at a price. Remember the financing cost? CFD brokers will finance your trades with leverage so long as you pay the interest rate. The longer your positions are open, the bigger the interest charged. Thus, long-term positions might not be the best option for CFD trading.
On Stock CFDs
Stock CFDs present their own problems for CFD brokers. These problems are related to the cost of, technical issues, and lack of experience in adding stock to their tradable instruments. Let's take look at how the current state of stock CFDs is.
- Costly Market Data
Licensing data from stock exchanges is expensive and legally complicated. Exchanges are well aware of the current state of the trading industry and have introduced new policies accordingly. Today, CFD brokers who wish to add stocks in their offering must undertake pre-audits and pay significant fees for the license. Due to these hassles, many CFD brokers are not actually exchange members. Instead, they work with other firms that have access to the live market.
- Unsuitable Platforms
The popular MetaTrader platforms might be suitable enough for most CFD products, but that is not the case with stock CFDs. For example, the MT5 does not offer a basic search function because the platform only lists a stock's symbol instead of providing its name. Another one; brokers that use the MT4 do not have direct access to the market, so they have to rely on bridge providers.
- Slow Execution
CFD brokers can execute trades in milliseconds. Their technology is fast, but not fast enough in dealing with exchanges that operate within microseconds. This may result in slow market data and slippages which can affect your positions quite significantly.
- Lack of Experience
When entering the stock market, CFD brokers compete not only with one another but also directly with the more experienced investment firms and banks. Investment platforms offered by these entities are usually more convenient and appealing for stock traders.
CFD trading gives you the ability to exchange financial instruments without owning ones. CFDs are usually traded with CFD brokers that have a wide selection of financial instruments across multiple assets. This gives you an opportunity to diversify your portfolio and apply a variety of strategies related to risk management and asset allocation. Another attractive factor of CFD brokers is that you can trade with leverage.
When it comes to choosing the best CFD broker, you should do research on your own. Learn and understand the reliability of a broker through its regulation, platforms, tools, services, education, tradable instruments, and costs including the hidden costs. Also, we recommend that you open a demo account first before committing your hard-earned money.