CFDs have become a popular alternative for traders looking for short-term leveraged trading of stocks and other assets. In this expert guide we will tell you what CFD is and how CFD trading works. It also lists and compares all regulated CFD brokers on the market with a detailed overview for readers who want all the facts before signing up. Compare all brokers to find a broker that meets your needs.
Popular CFD brokers in Africa
What is CFD?
Contracts for Difference (CFDs) are tradable products that mirror the underlying assets. When you trade CFDs, you enter into a buy (or sell) contract based on your margin and collect (or pay) the difference when you close your position. Unlike buying a stock or futures contract, CFDs are derivatives and do not own underlying assets during trading. CFDs can be made to mirror almost any financial product or market, including individual stocks, indices, currency pairs, interest rate products or bonds. If it moves and there is demand, you can check if there is a CFD.
CFDs are generally not recommended for new traders. If you read the above paragraph and need to provide Google with the terms used, do not trade CFDs yet. Clear understanding or utilization, margins, counterparty risks and the complexity of derivative products is encouraged. In general, CFDs are volatile and account for additional losses, so only trade what you want to lose. You should set up a demo account and experiment with it, but research and understand the product and its content before depositing real money into the account.
How do I trade CFDs?
The mechanism of CFD trading works in the same way as buying and selling stocks, futures or forex. With CFD, you do not actually own any underlying financial instruments. Trading is the price difference between the start of the trade and the termination of the trade. So the name is Contract for Difference. Most CFD providers will need to enter or exit positions across the entire spread. Let’s look at a trading example for clarity.
If we believe that prices are rising in the short term, we want to buy 100 “shares” of the XYZ company.
The current price is $10.55, the bid is $10.50, and the offer is $10.60.
- Click on the purchase outside the spread and pay $10.60 for 100 “weeks”.
- If you bought the stock yourself, you use a $53 margin on the position instead of $1050 + commission (assuming a 5% margin).
- The stock goes to the target of $11, which he decided to sell quickly.
- If you click on the SELL throughout the spread, it fills $10.95 for 100 “shares”.
Congratulations! You made a profit of $35 (35c per 100 shares x 100) on your position.
As you can see, the leverage is powerful. At $53 margin (66%), a profit of $35 is a much higher ROI than the 4-5% profit you get from buying a foundation, even if the total amount is a little less.
Here is the charm of leverage and CFD. Of course, the reverse is also possible. Equivalent action can wipe out all capital (and more) in a CFD account.
Why Trade CFDs
CFD is a leveraged product that offers significant advantages and disadvantages over ordinary shares or futures.
pros:
- Conclusion: Because of margins, CFDs are typically used by traders who want to trade short or intraday trades. Depending on your broker’s margin requirements and fee structure, staying overnight can be expensive.
- Leverage: The available leverage varies by broker, depending on the product and the market. The biggest advantage is the potential ROI traders can get with CFDs compared to common stocks. As you can see above, it is easy to make more than 50% ROI for the margin used, and it is very attractive for speculators who are used to risks.
- Margins: CFD brokers only need a margin of 2% to 20% on their current location, depending on equipment and volatility. Like forex, it gives access to expensive stocks that cannot be traded or traded on a larger scale than they cannot trade. For example, to buy 100 shares of Apple for $145, you need $14,500 and a fee in the stock account. With a CFD broker, you can trade 100 shares with a margin of $725 and 10 shares for $72.50. This creates new markets and opportunities.
- Global market exposure: Most CFD providers offer a variety of markets. You can trade German DAX just as easily as Australian shares. This can be done with one account without expensive data or running costs.
- Fees: Especially with retail brokers, transaction fees can grow very quickly. There is no fee for CFDs, only spreads (indicating your own challenges).
- Hedging: CFDs offer people with stock portfolios the opportunity to quickly and cheaply hedge long stock positions. Options can be cumbersome and difficult to structure, especially when used to hedge a position. CFDs offer smart traders an affordable alternative and a variety of hedging opportunities.
cons:
- Usage: This is a double-edged sword. With CFD, it is much cheaper to buy 100 shares of Apple, but it carries a lot of risk. If you move the foundation a bit, your ideal position value will disappear and you may remain in the red with your broker.
- Spread Cross: You need to cross the spread to start or end the CFD position. There is no limit order. This means you always pay a premium to enter or leave. The price paid to access the margin. Although it may not seem important, paying a spread can add a significant amount of money, especially if the traders are active. It is also very difficult to execute some strategies (for example scalping).
- Betting on brokers: CFDs are contracts with brokers. It’s earned when you lose. This raises many conflicting interests. It is very important to research the broker, make sure it is regulated (not many) and read online reviews. Contact us directly if you have any questions before depositing money into your account
Counterparty Risk
If you trade CFDs, it is necessary to conclude a contract with a broker for future movement of financial products. Unlike a basic transaction, the other party to the transaction is a broker. As you know, this creates a number of conflicting interest issues, and regulators continue to try to balance their clients between predatory practices and allowing traders to freely trade what they want.
Skeptics may argue that trading CFDs with brokers is gambling like a casino. Being a happy and smiling customer is the casino’s main concern.
Believers claim that the lifetime of their customers is a CFD broker, and that they earn enough money from spreads and volumes that the customer is not motivated to do wrong. Harmful practices have been reported to the regulators, which will ultimately harm business and profitability.
The takeaway is that traders need to research their CFD brokers and regulations. A good place to start is a list of recommended brokers.
Broker comparison method
- Distribution / Commission
- Utilization and margin requirements
- Trading Platform
- Options and opt-out options
- Additional functions
- regulation
- Mobile app
Each section is described in detail below.
Spread or Commission
Spreads or commissions affect all traders and all trades. Represent the ‘cost’ of the transaction. Therefore, it is important to compare one broker with another. But the direct comparison may not be straightforward. Spreads vary from asset to asset and can change daily if the asset is temporary. So a broker can have the smallest spread for a forex pair, but have the largest spread for an index, and the numbers can change the next day.
Depending on the asset, the broker is the cheapest or most expensive. So look at the spread of the asset you will trade the most when comparing spreads with brokers.
Leverage and margin
Margin refers to the funds a trader must deposit (and commit) to start a trade. So a £1000 trade on a GBP/USD currency pair would only need to open £500,000. The trader was exposed to a value of £ 1,000 of the risk, but that the trade (the risk of the total investment loss is very small, but this is the value of the position) – therefore the warning attached to the CFD transaction ”  loss may exceed the initial deposit  ” . Margins are also known as ‘leverage’. In this case, the leverage is often expressed in multiples, so 200: 1,200 times the leverage. Equivalent  margin  is 0.5%. Therefore, if brokers are compared with each other, low margins require less deposit. This is important to some traders, but less important to others.
Trading Platform
The trading platform can be approximately the same. If a trader finds it difficult to use a particular platform, it could be a mistake. Yes, most platforms have similar features but may differ in usability and appearance and some may not be suitable for all traders.
It is important to trade software that is familiar and easy to use. The trading platform doesn’t match the price for some reason, so traders can miss the price or make a worse mistake. For some users, the trade button is very obvious, but if you are a trader who accidentally started a large trade, you might want to choose a broker based on the clarity of the platform. All offer demo accounts of the brands listed here – try before you buy.
Options and withdrawal options
This is becoming less important as brokers add more and more payment methods. However, the list of withdrawal methods is limited, so if you have problems getting money from payments or brokers, you will know how important the method is. Check first.
Features (charts, technical analysis, research)
If you want to research a deal through a broker or software, you want to use the best research tools. Graphics standards vary widely. Some brokers (especially ETX Capital) offer the best charting capabilities with a variety of technical analysis tools that will satisfy even the most avid technical analysts. However, some brokers assume that traders do not research or do elsewhere. Their tools lag behind their competitors. Check your demo account again to make sure that your broker has the required standards.
Other factors
Other factors that enable new traders to compare CFD brokers are the quality and availability of mobile trading applications. For many traders, mobile trading will be important. Others will be happy not to use the mobile app.
Regulation should be a core criterion for all brokers. This page only contains regulated CFD brokers. It has fewer comparison factors than prerequisites.
Bonuses can sometimes shake the dealer. Terms and conditions are always important in awarding prizes. They can often overwhelm new customers. But if used correctly, the bonus can be useful, since it trades more funds or trades without two risks. Short-term bonuses do not compensate for costs spread over the long term.
Our review covers all the elements needed to compare CFD brokers, and as mentioned earlier, every CFD broker on the page offers a demo account. This allows traders to take the time to read the detailed review and try the platform themselves before choosing. After you have all the information, you can decide which CFD broker is best for you.
Find the best CFD broker
Use these steps to make informed decisions about which brokers are best for you and your unique investment style.
- Consider your trading style. For example, what assets do you trade and how often? Size of each transaction, general trading objectives, etc.
- Choose the CFD broker that suits your trading style and strategy
- Use demo accounts. Compare each trading platform you list.
- Make the best choice after using and trading on each platform.
- Deposit and trade real money
Remember: Traders can use multiple brokerage accounts and use accounts with the best conditions for a specific transaction or asset. Trade gold with one company, US stocks with another company. Use an account that offers the best offer for a specific transaction.