More and more investors are turning to contract for difference (CFD) trading to diversify their portfolio and benefit from the possibilities it offers. But, as with any investment, the advantages also come with their risks, so it’s important to know you are trading on the best platform possible. In this guide, we will take you through how to ensure you are using the right CFD broker to conduct your trading and investments.
CFD trading explained
A contract for difference allows investors to open a position on a variety of markets, including stocks, indices, forex, and commodities, without owning the underlying instrument. Instead, the investment is based on the speculation of their price movements.
The CFD acts as an agreement between the investor and the broker, with the investor entering the CFD on a quoted price. The profit or loss is then based on the difference between the quoted price and the price of the CFD at the time of closing the position, mirroring that of the underlying asset.
These exchanges do not take place in a physical place, like other traditional forms of trading, but are traded through online CFD platforms. The prices of the CFDs are reflective of the base markets, with the organization of the supply and demand of CFDs, determined by a network of CFD brokers.
The best CFD brokers
In order to find the best CFD broker online, there are certain advantageous features that platforms can offer that you should look for before finalizing your decision and opening an account. Here’s a checklist of the benefits that the best platforms will offer you:
Leverage – This is a tool offered by CFD trading platforms, and enables investors to access larger exposure to the market, with a lesser amount of initial capital. Essentially, the value of the position in the market is based on the amount borrowed from the CFD broker, with any losses or profits reflective of that increased value.
When looking for the best CFD broker, you should ensure that they have good ratios of leverage. These ratios determine the value of your position in relation to the amount of capital. For example, a ratio of 1:30 means that a deposit of £100 is worth £3,000 of investment.
Free Demo Account – The best CFD brokers should offer you the option of practicing trade through a demo account before opening an account using real money, and this notably should be a free option for you to partake in.
Through a demo account, you have the opportunity to get to grips with the workings of your chosen market, develop your trading style and grow in confidence. You can also test out the success of any strategies or techniques before applying them to the financial market with real cash.
Risk management tools – There is usually plenty of information and tools you can utilize on a good CFD trading platform. You should be able to apply a Stop Loss or Stop Limit when opening a position in the market, or if you choose to edit your current position. A Stop Limit works in order to protect your profits, whereas a Stop Loss aims to minimize your losses, closing your position at the specific rate you have set.
A Guaranteed Stop can also be added to your position, and this applies an absolute limit on your potential losses. This however can only be used for some instruments, so it’s worth checking what your chosen CFD broker has to offer.
Access to a variety of instruments and markets – A good investor will have a diverse portfolio, so a relative CFD trading platform should have a wide range of instruments available that you can trade-in, as well as grant you access to markets around the world.
The benefits of a good CFD broker mean that you can invest in different assets and markets, all from the same account. For example, on a site such as https://www.plus500.co.uk/Trading/Forex you can monitor all the major currency pairs in the forex market and keep up to date with the fluctuations in value.
The benefits of CFD trading
When using the best CFD broker, you can gain all the benefits of CFD trading. This includes the option of using leverage, as aforementioned, as well as implementing relevant trading strategies. Since owning the underlying asset isn’t a requirement, you can open a position on both a rising and falling market, for example. If you do also happen to own the asset in question, you can open a CFD to hedge the risk and offset the losses that occur in a falling market, as well as from one market to the other.
As with any investment, always do your research into the market and assets you wish to partake in, as well as find the best CFD trading platform to embark on your trading journey.