Best CFD Broker

Finding the best market to trade using Contracts for Difference (CFDs) is a very personal choice but we’ll take a look at some of the key criteria you might want to consider to find the best market for you.

Here are 3 components that will make the most difference to choosing the ideal CFD market.

1. Trading a market that allows zero brokerage

2. Trading a CFD market with the right amount of volatility

3. Identifying your preferred trading timeframe and trading style

1. Trading a market that allows zero brokerage

First we will have a look at the concept of trading those products with no brokerage and the best way to get started is to keep your brokerage to an absolute minimum. There are some fantastic products that enable you to trade CFDs with zero brokerage or zero commission like index CFDs or Foreign Exchange. Not only are Index CFDs and Forex commission free but you can trade then for as little as $1 per point movement. When you are starting out, trading at $1 per point is a low risk way to ‘dip your toe in the water’ and get some live trading experience.

2. Trading a CFD market with the right amount of volatility

The second criterion to consider is market volatility. Most people trade Contracts for Difference on a short timeframe so selecting volatile stocks can give you access to ample opportunity. One of the best ways to identify a volatile market is using an indicator called the average true range (ATR). The Average True Range (ATR) will tell you exactly how volatile your market is on a daily basis. Another way to use the ATR is to fade the market at extreme ATR readings. However those who use this particular method need to have quite a lot of skill before doing so.

3. Identify your ideal timeframe and trading style

Markets like foreign exchange (Forex) and Index CFDs can be traded up to 24 hours per day and you will need to work out the most appropriate time for you to trade and build this into your trading plan. Further to this, you will need to work out what sort of timeframe you are going to trade as a 1 hour chart may not suit your trading personality.

If you are a very short-term trader you may wish to use something like a five-minute chart, therefore products like foreign exchange in index CFDs will be the product of choice, due to be high volatility and ample liquidity. If you’re trying to trade low liquidity stocks and you are using a five-minute chart your find that there’s a lot of dashes which represent no trades and low liquidity. These types of markets will be useless to a short-term trader.

What about the Forex markets?

Taking into account your trading capital will also dictate which markets you can trade. For example, if you have a small trading balance, then trading Forex markets over a medium to long timeframe will be futile. The Forex markets move too fast and have large minimum parcel sizes which mean you’ll go backwards quickly if trying to trade FX on a longer time frame. You will find a shorter time frame with a small trading balance is the best for you.

You purchase and sell CFDs just as you would purchase shares. However CFDs are not shares but their costs will move nearly exactly as the share they cover.

For example, BHP will possess a CFD equivalent. In most instances, if the cost of BHP rises by 10 cents, then the BHP CFD will also go up by ten cents. Instead of really owning the underlying shares, you are only entitled to, or are liable for, the difference between your buy price and your selling cost.

CFDs are leveraged items. You only place up a fraction from the notional share price to manage the same quantity of shares. The leverage offered by some CFD providers could be as high as 33 times, but is usually around 20 times. This indicates that for $100, we get exposure to $2,000 value of shares.

When buying CFDs, we effectively are placing up $100 within the transaction and also the CFD provider puts up the other $1,900. The CFD supplier then gives us the same exposure as if we had gone out and bought $2000 shares on the Asx ourself.

For that privilege of basically borrowing $1,900, the CFD supplier will impose on us an interest rate. This rate is usually the cash rate plus 2% or so, or around 7.5% pa.

Now, the excellent point about utilising CFDs to hedge is that we will be sellers of CFDs. When we sell CFDs, the CFD provider will usually pay us an interest rate from the cash rate less 2% or so, or close to 3.5% pa.

Hedging with CFDs utilises the idea of short selling. When we short sell we’re trying to sell before an expected fall within the share price. Let us say you own one thousand AWB shares that are buying and selling at $6. It becomes public that management has been included in some relatively shady deals with the former Iraqi Government. You expect AWB shares to tumble in price. To prevent the expected falls, you would sell AWB instantly right?

Precisely, so you sell at $6 and get $6,000 back again into your bank account. Let us say that your hunch is right and AWB shares tumble to $4. The scandal blows over, and also you decide to purchase back again the AWB shares at $4 because they now look cheap.

Now, it ought to be obvious that by taking this quick action you have saved yourself $2,000. You still have one,thousand shares of AWB as at the start of the transaction, but you have successfully created a notional profit of $2000– this quantity is nevertheless sitting inside your bank account after the transaction is finished.

Short selling uses the precise same concept. You are looking to sell 1st, and purchase the share back later on after it falls. The only distinction with short selling from normal selling is the fact that we don’t need to own the shares prior to we sell them. Within the above example, we did not have to own the AWB shares to short sell them. With CFDs, we can simply sell them at $6, and then purchase them back again later on at $4. In this case, instead of making a saving we are producing a profit of $2,000.

So, that is short selling. We like to think of the phrase “short” in this context: “Sure, I would love to buy you a beer following work, but I’m a little short today”. Short refers to not having some thing at first.

As we said above, selling a CFD is like selling the actual shares. The idea is the fact that if we sell a CFD corresponding to the shares within our portfolio, and then the price of these shares fall, the profit from selling the CFDs will compensate us from the fall within the exact same shares we are holding.

Let’s use an example: For continuity, let us use the AWB instance above. AWB CFDs possess a leverage of 20 times. This indicates that to totally hedge our one thousand AWB shares really worth $6, we only have to put up one-twentieth of the value of AWB shares, or $300 to short sell one thousand AWB CFDs.

So we put $300 aside within our CFD accounts and click the sell button for one thousand CFDs on our CFD trading platform. For all intents and purposes, short selling 1000 AWB CFDs is precisely the exact same as selling your actual AWB shares.

When AWB falls to $4 1 month later on, we’ve of course lost $2,000 on our share position. The great news however, is the fact that the value of our CFD accounts has risen by an equal and opposite quantity. In addition, we have really accumulated some $17.50 in interest from our CFD supplier for being short! So, actually, we have created a small net profit by utilising these CFDs to hedge.

What’s the downside? Well, as with anything in life there’s one – so do not get too excited. If AWB shares rose, we would similarly make an equal and contrary loss on our CFD accounts from our CFD short position, than we would make on the AWB shares from their cost rise. In the above example, we would have lost $2,000 on our CFD accounts. This would need to be financed from somewhere else – either selling a number of our AWB shares – our straight out of our back pocket!

So, there is a trade-off for this very effective ideal hedge. Despite this nevertheless, shorter-term, targeted hedging strategies using CFDs are possibly probably the most effective methods of hedging a share portfolio.

CFDs have become a progressively common investment strategy for Aussies. For people who are fresh to the market, however, CFDs can be difficult to grasp initially.

Let’s break down CFDs for all those beginners present.

Let’s get one thing straight: CFDS aren’t shares.

Actually, CFDs have all the advantages of trading stocks, without the need of you actually needing to physically buy, own or sell the shares.

CFDs are almost similar to a board game variation of trading real shares in the market. They mirror the overall performance of a share, or an index.

With CFDs, you are making a contract with a provider (like IG Markets or CommSec) about the opening and closing price of a share or index you’re considering.

You are making a deal with the CFD provider to exchange the difference between the opening and closing prices of your share or index.

E.g. you think a company is going to crash. You can instruct your CFD provider to specify the price of the company’s shares (the start of the contract) and what level you believe the shares will fall to (the close of the contract).

If and when you hit your target, the CFD provider pays out cash relating to the difference between the starting share price, and when the contract is finished.

Generally participants typically keep CFDs for just a a few days or weeks. While CFDs are ideal for short-term trading, they’re not good for long-term trading, because every day you retain a position it costs money.

It’s actually not really a lot of money each day, but it’s money all the same. Whenever you buy or sell a share/index/tradable instrument, the usual expense is 10% of the price of the underlying shares.

It is good that CFDs are a great deal cheaper than trading real shares, as you are only trading on a margin.

And there’s also the side benefit of receiving access to the company’s dividends released during the CFD’s life.

However there’s downside, as well. Take into account CFDs are contracts, meaning they are two-way. You receive money if the price goes the way you think it does, but if it does not you will have to pay the CFD service provider when you get out of the contract.

The “borrowing” procedure involved in CFDs also magnifies whichever profits and losses you carry out, so whilst you stand to make decent money, you could also lose a lot more than you decided to put down to start with.