CFDs (Contracts for difference) are a type of derivative which is generally under very lax regulations. They are flexible and come in many different shapes and sizes. You can set basically anything as their underlying asset because you are not actually trading any items. As a result, however, you are unlikely to find these kinds of derivatives on an exchange. If you desire a truly flexible CFD, an exchange wouldn’t cut it anyway. This means that you will have to find someone to set up your CFD contracts for you. A CFD broker is, most obviously, the way to go.
Brokers will be able to set up your contract for you however you like. However, this varies depending on the broker. This is why you should be aware of the types of brokers that are available out there and how each broker’s services may differ. Hopefully, in this way, you should be able to quickly find the type of service which could handle your specific needs.
Security with CFD brokers
What also varies among brokers is their trustworthiness. This is the first thing you should consider when choosing a specific broker. Due to the fact that the world of CFDs is highly unregulated, you have to ensure that whichever broker you are going with has an exemplary history and practice. Therefore, there are several things factors you can check when choosing a CFD broker.
Firstly, make sure they are regulated. Every trustworthy broker has an associated regulatory central body. They make sure that the broker abides by proper regulations and acts in a way you would deem legal. It would also be best if you checked the regulator on the broker’s list. See how trusted they are. See if they even exist, as some brokers may be outright fraudulent about such relationships.
Secondly, you would do best to check their profits. Most brokers usually display the kind of profits they make for their clients. Obviously, they all want to show their most positive statistics first. You would do best to carefully scrutinize what statistics they put forth. It may be that they are only showing a part of the full story.
Finally, do a close investigation of their reputation. Try to read online reviews of them, forum posts; see if they have been in the news. See what the community’s take on them is. Generally, find any information that can help you decide if they are the real deal. If you can, try to contact them the broker to see if there are any real people willing to talk to you.
Types of CFD brokers
When searching for a CFD broker, you should ask yourself is what you are looking for. The major division we make is between discount brokers and full-service brokers. These two types of brokers differ mainly in their prices.
For their lower price, the discount brokers simply connect you to other traders and allow you to create any contract you want. Generally, you can identify discount brokers more by a lack of features as opposed to the inclusion of more. These are almost entirely online services without physical locations you can visit. They are more flexible, but flexibility comes with risk. If you do not know what you are doing, you could end up making a contract that results in a very disadvantageous situation for you.
If you want to ensure that you do not end up in such a situation, a full-service broker may be for you. They require a higher price, but on the positive side, they offer more. They can give you personal advice on where to go with your contract and will help negotiate with the other party for you. These are also the more traditional brokers. So, while they may have an online presence, you should also check if they have physical locations and people who will talk to you.
A full-service CFD broker may offer something traders call a dealing desk. Dealing desks find a deal for you, as opposed to just you finding it yourself. They will find a client who offers something resembling what you want and help you make a deal. So if you desire to bet against an asset, they will find someone who believes the asset will increase in value. In fact, they do not even have to find another client. They can offer up the money for you to trade against the broker yourself.
They are also unlikely to give you market rates, unfortunately. However, since they do require greater payment, these establishments are also more trusted despite the absence of rates.
A discount broker is more likely to be a no dealing desk (NDD) establishment. They do not find deals for you, but they do show you official market rates before you choose. This gives you more room to choose for yourself.
You can then identify NDD brokers in two camps. The first is the straight-through-processing (STP) broker. They send you straight to the market to find liquidity providers you may want to deal with. The second type of broker is the electronic communications networks (ECN) broker. These brokers send you to link up with the orders of other traders, which suit your needs. They resemble dealing desk establishments more, in that they give you less determined prices, things are a little hazier.
There are several other factors you should be examined when deciding on your CFD broker. For one, check how they charge their clients. They could require several different sources, which could include a spread (floating or fixed), commission fees, marketing costs. They may not display all of these costs at once, so it may be up to you to calculate the possible fee beforehand.
Check what their trading platform is like. Most trustworthy brokers will offer their own personal trading platform to make trades on. See how responsive it is. If there are any delays it could severely ruin your trades at a critical moment. You should also check the tools it has. For example, see if it has any tools for trading automatically after a certain price point is reached. This kind of tool can help you pull out of a trade before a point of no return.
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