Top 5 Signs You Need to Change Your CFD Provider Now
Contract for differences (CFD) provide investors with the opportunity to gain exposure in the price movements of shares or other assets without actually owning them.
With CFD, you’ll only need to put up a certain percentage of the capital required to gain exposure to a particular asset, say, indices. Learn more about indices trading with IG.
What’s your benchmark for CFD trading?
A CFD allows you to profit from an increase or a decrease in the price of the underlying security. Of course, you would incur a loss if the market moves in the opposite direction to one that you had anticipated.
You can read more about how CFD trading works here.
An important factor for success in trading, is the selection of a competent and well-established CFD provider. The institution that you deal with should offer a trading platform that is easy to use, so that you can convert your ideas into trades quickly and efficiently.
But all trading platforms and the CFD providers behind them are not the same. It is important to review the features that the different providers offer.
What exactly should you look out for when comparing different CFD brokers? Here are five areas that deserve your attention.
1. How are prices quoted?
A CFD Provider will always quote two prices for a trade, a bid price and an offer price. The bid price, allows you to enter into a contract with the broker where you expect the price of the underlying security to fall. Your trade is referred with the broker is referred to as a “short” position in the CFD.
The other rate that the CFD provider will furnish is the offer price. This allows you to open a “long” position in the CFD. You will profit from this trade if the price of the underlying security rises.
It is important to remember that the two prices quoted by the broker will influence your profit or loss in the transaction.
A CFD Provider will enter into an agreement with you on the basis of one of two models.
- Market making model – the prices quoted are provided by the broker but the broker may offer additional liquidity which may not be quoted on the relevant exchange.
- Direct market access (DMA) – in this model, the bid and offer sizes are directly based on the queue on the exchange.
Depending on your trading style, both types of brokers have their advantages. The market maker model is popular as it gives access to a wide range of assets including forex, indices, shares and commodities, while the DMA model is restricted to shares and forex.
Need to switch providers? IG offers both the market making model and direct market access, giving investors the best of both worlds.
2. How are the charges?
If an investor is planning to trade on a regular basis, it is natural to evaluate a CFD Provider by the commission or spread that is payable per trade. A lower commission means reduced costs on each trade. However, this may not be the case in every instance and it is essential to understand the full costs of CFD trading.
When it comes to CFD trading, it is also important to note that there are other charges when you hold a position overnight. This funding cost differs for long or short positions and varies with asset class. For CFDs traded in a currency other than your account’s base currency, a conversion charge may also be incurred upon closing a position.
Looking at lowering your cost per trade? IG charges just 2 cents per share for US share CFDs, or spreads from just 0.6pips on forex majors.
3. Margin requirements
When you enter into a CFD trade, you are not required to put up the entire amount for purchasing a particular asset. Instead, you’ll need to pay only a certain percentage of the value of the trade to your broker. This amount, referred to as the margin, is the sum that the broker holds on your behalf and which will be used to cover any losses on the trade.
The margin requirement for Share CFDs could be 10% or 20% or even more of the value of the trade. A higher margin provides additional security to the broker, especially during periods of high volatility.
Looking at blue chip stocks? IG’s margin requirements are as low as 10% for all of the STI component stocks for normal market conditions.
4. Which are the trading tools available to you?
Your ability to make profits will depend on a considerable extent on your skills as a trader and how well you anticipate the fluctuations in the market. But it is essential that your broker provides you with the necessary tools to follow the market and take informed decisions.
You may want to conduct a review of the facilities that your current broker provides.
- It is useful to have the ability to put a “stop-limit” or guaranteed stops on your trades. Does your broker offer this?
- Do you receive timely orders and price alerts?
- Are various charting tools available to you?
- Are research reports provided on a regular basis?
If your broker does not provide you with this range of features, you may be losing out. Paying more for your trades could be well worth the expenditure if you’re better equipped to trade.
IG has a wide range of trading platforms suitable for both retail and professional investors, that provide order types like limits, stops, guaranteed stops, trailing stops and market orders. They also provide IG mobile charts for tablets, and ProRealTime charts for its web based platforms.
5. Is your CFD provider regulated by MAS?
It is a good idea to check whether your broker is regulated by the Monetary Authority of Singapore. The regulatory body imposes strict conditions on the institutions that it monitors. Your money is likely to be better protected with a MAS-approved institution.
CFDs: A high-risk financial product
Investing in CFDs are risky, if not done with a proper strategy and risk management. This product can give you significant financial benefits but it can also wipe out the capital that you invest.
Need to know more? Start here.
Vital features you will need for CFD trading.
This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2016). All views expressed in the article are the independent opinion of ZUU.