6 Questions You Need To Ask Your CFD Broker (Before You Start Investing)
Successful CFD (contracts for difference) trading can be very profitable. It does not require a big sum and you can enter and exit trades online on your own. If the market moves in your direction, you’ll receive positive gains. However, like all forms of investment, if the market moves in the opposite direction, there will be losses incurred.
Newcomers are usually keen to jump right in, but a big part of improving your CFD trades lies in choosing your CFD broker carefully.
In fact, the CFD broker that you select could play a big part in determining the success of your trades. But how exactly does one go about choosing a CFD broker?
Should you open an account with the biggest broker, or the one that offers the lowest commissions? It is a decision between quality and cost and it can be a tough one because most brokers offer similar facilities and it can seem to be hard to make the correct choice.
Here’s a list of six questions that you can ask the brokers that you shortlist. You will be able to get some of the answers on their websites. For the others, you may have to speak to a licensed representative to gain a complete understanding of the issue.
1. Is the firm regulated by MAS?
The Monetary Authority of Singapore plays an important role in keeping track of the companies that are active in the country’s banking, capital markets, and financial advisory sectors. Before you open an account with a CFD broker, you must ensure that the firm is registered with MAS. The ultimate risk is trading with an unregulated broker based overseas where operations and background cannot be easily verified.
Remember that every CFD trade that you carry out is subject to “counterparty risk.” That’s the risk of default by your CFD broker. When you trade CFDs, you aren’t actually buying the underlying asset.
What you are doing is entering into a contract where the two parties agree to pay the difference between the opening price and closing price of a particular asset.
Now, if the other party, which is the CFD broker, defaults, you could lose your money. That’s why it is absolutely essential to check whether the broker is registered with MAS.
2. What is the margin requirement?
One of the chief attractions of a CFD is that it offers leverage to investors. You can put up a small fraction of the value of the underlying asset that you plan to trade in.
So, if the value of the underlying asset is S$10,000 and the margin requirement is 5%, you would only need to place a position of S$500 with your broker.
If the price of the underlying asset rises to S$10,500, you would have earned a sum of S$500 on your trade. That amount is equal to your initial investment. That’s a 100% return in a single day. Of course, you could also lose your margin of S$500 if the trade moves in the opposite direction.
If your broker allows you a greater degree of leverage, you will have more flexibility in utilising your investible capital. It’s important that you check on the margin requirements for different asset classes.
For example, share CFDs carry a margin requirement of 10% or 20%. For forex CFDs, the margin could be as low as 2%.
3. Does the platform offer stop-loss orders?
A stop loss order can help you to limit your losses in an unfavourable trade. But your broker may not guarantee that it will be implemented. If the market makes a sudden move, it may not be possible for your order to be executed in time.
Does that mean that you can’t be sure if your stop loss order will be carried out? In fact, you can check if your broker’s platform has a guaranteed stop loss order (GSLO).
CMC Markets offers GSLO and does not charge investors unless it is triggered. This simple step can make a big difference in protecting your investment and reducing your risk.
4. Does the platform offer narrow spreads?
The spread is the difference between the buy price and the sell price. It’s an important income generator for your CFD broker. When you enter into a trade, you must make a profit that is at least as much as the spread to merely break even.
If there is a wide variation in buy and sell prices, your profits will be lower. You should deal with a broker who offers tight spreads.
However, the spread also depends upon the volatility of the underlying asset. Bitcoin spreads could be high while forex spreads will be much lower.
5. Does the platform offer the markets and asset classes that I might possibly want to trade in?
There are thousands of different CFDs that you can buy and many different asset classes that you can choose from. Here are some of the markets that you can speculate in:
⇨ Stock indices around the world
Obviously, you won’t be trading in all the different types of CFDs that are available. But it is useful to know about the range of markets that you can access.
At a future date, you may want to buy a CFD pertaining to a certain index in Europe. At that point, you may realise that your broker does not offer access to that market.
As a general rule, it is better to sign up with a CFD broker that offers a wide range of trading opportunities.
6. What are the chargeable fees?
The fees and charges that you are required to pay will reduce the profit that you make on a trade. There are several costs that you may have to bear. These could include:
⇨ Commission – this is charged on the share CFDs that you buy. There would usually be a minimum commission on each trade.
⇨ Financing charges – the CFD broker would charge you if hold a position open overnight.
It’s best to obtain full details about the fee structure before you open your account. This could prevent you from receiving an unpleasant surprise later.
Test the CFD broker’s services
Although you will be using virtual or make-believe cash, you should take the exercise seriously. The experience that you gain could be very useful when you start trading with real money.