Finding the right CFD broker that suits your style of trading and your technical requirements is imperative for your trading success but what should you look out for when choosing a specific broker?
Since their introduction to the UK market in 1998 (and now across Europe) CFDs have grown rapidly in popularity with retail and professional investors, hedgers and speculators.
This rise in CFD traders has lead to an increase in the number of CFD brokers available and the market has become more competitive, with many brokers now offering:
Not all CFD brokers are offering the same service. Some will offer a 'market-maker' service and others will offer what is known as Direct Market Access (DMA).
The services available cover a wide range of value-added extras that brokers and providers now offer. Competition for your business is fierce and it's now no longer just about the commercial terms a broker can offer, there have to be other incentives to encourage new traders to open accounts.
Minimum account opening balance
Most retail brokers have minimum account opening balances: how much you'll need to deposit with them before you may start trading. Most brokers accept payments via a bank transfer or a debit or credit card payment but forget cheques, as they just aren't practical when markets are volatile and you need to move money quickly.
TIP: Always ensure you have access to liquid funds in case you need to top up your account at short notice and whilst many of the brokers will offer you attractive leverage rates don't make the mistake of overtrading as you'll end up risking too much of your account balance on one trade.
TIP: Familiarising yourself with their depositing procedures is important if you intend trading on markets that could be volatile. This will ensure you are able to meet any further funding requirements should your open trades move against you.
Some CFD providers have moved away from the DMA trading model and have instead become market-makers: where the broker makes the price and takes all orders onto their own book.
Market making companies will act as a counter-party to your trades (Spread betting and CFDs) so if you're comfortable with this relationship these are cost effective accounts to look at as they rarely come with the data charges associated with DMA trading accounts.
In these circumstances you (the trader) may find that the price being offered by the market-maker (the broker) differs slightly from the actual market price. However, it is unlikely the price will differ too much as this would create opportunities for 'arbitrageurs' to trade with both the exchange and the market-maker at prices guaranteeing a profit!
Brokers offering Direct Market Access (DMA)
Other CFD brokers will offer what is known as Direct Market Access (DMA), which allows traders to place their orders directly into the exchange and to be able to see the order working in the market alongside the hundreds of other orders that are being worked by traders around the world.
There are some traders who prefer to trade in this way as they feel that being able to view other orders in the market offers a better 'feel' for the short term direction of the market and in some circumstances can assist with the placing of both stop losses and limit orders.
TIP: DMA trading accounts are best suited for 'active traders' and so you if you trade infrequently may find that the account costs that are passed on by your broker make this type of account unsuitable for your needs.
Whilst this way of trading CFDs does remove any possible conflict of interest with the CFD broker (your trades are going straight onto the exchange, not onto the CFD brokers book), it should be noted that it is likely to be more expensive as the CFD broker will often require you to pay towards exchange fees and to view the order book.
Read more on Direct Market Access
Opening a CFD trading account is relatively straightforward with many companies offering an online application process. Below is a table of CFD brokers with a few key account-opening criteria that we believe should be considered when you are deciding which broker to open an account with. It's not always about price; finding a broker that suits your style of trading and your technical requirements is as, if not more, important than shaving a few pence off of your dealing costs.