A CFD (contract for difference) is a financial instrument. It allows people to invest in assets without actually owning them. The strength of this type of investment is its direct correlation with potential gains and losses.
The advantages of using CFD brokers instead of going through the hassle of buying and selling assets are many:
- You get to participate in potentially unlimited gains while limiting your investment risk by only putting down a small percentage (but still receiving all profits).
- CFD brokers allow trading during both rising and falling markets; they provide you with leverage, meaning that if you put down 10% of your money, you can buy or sell up to ten times more contracts than would have been possible had you the total amount.
- Since brokers provide their liquidity, rather than having clients’ funds mixed with their own, as in the case of other forms of trading, you don’t have to worry about your broker going bust and losing your money.
What does this all boil down to? The greater the leverage and the more active the market, the higher potential gains, and losses.
How to find the right broker?
CFD brokers are not regulated by any official financial institution. This means that almost anyone can call themselves a CFD broker because there are no strict criteria for ascertaining trustworthiness or legitimacy. Therefore it is up to you to perform due diligence on any company before handing over your money via their website or over the phone/email. Ask around among friends and colleagues, and someone might be using them already, and check the forums for any negative comments about them. If there are no clear warning signs and the broker seems legitimate, you can move on to step 2.
Test your prospective CFD broker by giving a small sum of money to an acquaintance who has trading experience and asking him to open a test account with the company. Alternatively, you can go to a specialized forum where test accounts are opened for new members or try out their demo account offered by most brokers on their website before opening a “real” account.
This is all the more important because many brokers will offer you lucrative bonus offers to get your business, but read the fine print carefully. They don’t tell you that it might be impossible to withdraw your money before you have traded enough to meet their specified minimum withdrawal requirements.
Finally, once the test period is over and you are satisfied with all aspects of the service provided by your broker, then open an account for real. Brokers offer many different types of accounts – some might suit you better than others depending on how often and for what amounts you plan on trading. For example, if you want to set yourself up for future day-trading, take a look at brokers who offer mini accounts or micro-accounts. If you are investing longer-term or want unlimited access to funds until your subsequent withdrawal request, consider full accounts instead. If none of this seems to work out because the potential amount that can be lost is too high, CFD trading might not be for you.
Summary
Finding the right broker can make all the difference between an experience that makes you happy and one which leaves a sour taste in your mouth. So take some time to find someone who has an easy-to-navigate website; shows transparency; gives out regular information; provides support when needed; doesn’t charge hidden fees, and most importantly, provides you with leverage that allows you to control large amounts of money while limiting your exposure. We recommend using a reputable online broker like Saxo Bank, which offers low commissions and excellent customer service and demo accounts for beginners to practice different trading strategies before investing real money.
