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What is CFD | What does it stand for?
Last Updated on 6th September 2016: CFD in forex trading stands for Contract for Difference. Essentially CFD trading allows an individual to trade without actually receiving the physical goods. According to Intertrader.com a CFD can be explained by:
CFDs are generally the preferred trading type for professional traders. They allow the use of leverage, whilst offering the freedom to trade however an individual likes.
How it Works
If you purchase 1000 shares (the old fashioned way) you would have to purchase through a stockbroker, paying the full value of the shares + a commission for the purchase itself. With CFD accounts you don’t have to pay the full price and you essentially have to pay a smaller percentage (based on leverage) to “have” these shares. Technically you wouldn’t own the shares. You can also short the same shares with the exact same process. The split between the bid price and the sell price is where the Contract For Difference company itself makes its money. CFDs are used for forex as well as commodities even energy and metals.
Advantages of CFD Trading
- Increased Leverage – This means that the individual needs less capital outlay per trade and hence;
- Decreased Capital Needed to Start – Generally there is a certain number you will need to become a successful trader, whether this be £10,000 or £10 million. With CFD trading platforms this figure is greatly reduced.
- No minimum deposits – Although there might be min deposits to open an account, these figures are usually extremely low (£500 for example.)
- Variety of Trading – Foreign exchange, commodities, stocks and energies.
- No Commissions – The brokers make money from the spread between the ask and bid prices.
Disadvantages of CFD Trading
- Spread Prevents Small Margins – The spread between the ask and bid prices between very short term trading, although forex generally doesn’t suffer from this being such a volatile market.
- Brokers not highly regulated – This is the reason why we included a how to trust a broker section in this article, read carefully before signing up to any company that seems to good to be true.
- Long term trades – Holding trades for more than a day usually results in additional fees, these are usually low but you should check with your broker before making a long hold trade.
How to Trust a Broker?
As mentioned above CFD brokers aren’t regulated in the same way as other financial companies, as a result finding a trusted broker is incredibly important! Generally you want to look for 3 things. 1.) Size of the company – Do some research on how much the company itself makes and how many active traders they have, these numbers are easy to find, you can usually just Google the queries. 2.) Age of the company – Similarly with the size of the company, a broker who has been around for 10 years or more generally is respected and hence trusted both by its users and its owners! 3.) Interface + Updates – This is one that I have learnt to look out for for smaller-mid sized brokers. Generally a broker that wants to expand their business and customer base will continue to update their interfaces, offer more for their existing customers and update their software almost weekly! If you don’t already have this happening at your current brokerage it may be time to move.
We recommend Etoro as they have all of the above as well as a couple of extra elements too. We have a good relationship with them and can offer all new customers (excluding US customers, sorry guys) a deposit bonus. You can get that by CLICKING HERE.
UK Regulated vs Good for UK Residents
There are a number of brokers that are regulated in the UK. All this means is a United Kingdom based financial authority is who they answer too. For example FX Open is a nice platform I personally used to use as its seen to be one of the best in the UK. But as I started to trade more and use different platforms, I found that it doesn’t actually matter where you were based (for the most part.) So instead I moved to a couple of other platforms which were originally based outside of the United Kingdom, long story short, I preferred them in the end and nowadays all my CFD trading is done through Etoro (and one other broker who I am personally reviewing in the next 3 weeks so stay tuned!)
How to Test an Interface?
One of the keys to a great broker is their interface. Whether this be cloud based or a downloaded program, you want to be able to use the software effectively and quickly too. Testing an interface is really easy, all you need to do is set-up a demo account and see if it makes sense. Usually these are easy to set-up and test and you don’t need to have a deposit to use a demo account either, which obviously makes sense.
Social Trading & Automation – Why I Recommend Them
Another reason why I like the etoro platform is they allow social trading, this essentially means you can follow the top traders in the world and make the same trades as them. Obviously the unit sizes might be different, but if the trader lets people “watch” or “follow” them, then this is a great way that the community can help each other make a lot of money and help beginners get started at the same time.
Another reason I like this platform is the automation tools they offer. They were voted #1 for automating trading in the UK in 2015 and implementing these automation points is very easy to do and once you have a strategy or system you trust, can be a very profitable method for you too.
You can find our full reviews and recommendations of the top forex traders here, and our in-depth review of Etoro here too. If you have any questions about CFD trading in general feel free to get in touch.