Trading CFDs can be a high-risk trading strategy, especially if you have little to no experience. That does not mean you can’t get started at it. You can choose a reputable shares CFD trading broker to help you chunk away at the learning curve.
The best equity CFD brokers provide sound advice and an enabling CFD trading facility to help clients make worthy returns.
While there are many different types of equity Contract for Difference (CFD) brokers, most can be categorized into just three CFD broker classes.
Here they are:
Institutional CFD Exchange Brokers
This is how contract for difference trades were first used. With time, though, the trade instrument has opened up to private, smaller equity CFD brokers.
Institutional brokers are ideal for large traders. They also provide anonymity—mainly because the large volume trader needs not reveal their identity since trading a CFD does not involve buying or selling an asset.
Examples of such large traders could be well-funded professional brokers and hedge funds. Institutional CFD brokers usually pack a ton of experience in different markets so they can handle large orders that need finessing in the financial markets.
Retail CFD Brokers
This category now comprises of the largest block of share CFD brokers. They are also referred to as private client CFD brokers.
Trading equity CFDs makes sense to private traders for several reasons and one of the top reasons is because you can use leverage to increase your exposure. Using leverage means you only need to deposit a small amount (percentage) of the entire value of a desired trade to open a position.
That is called trading on margin.
For that reason, and the fact that CFD trading allows traders to take advantage of shares’ fluctuating prices to make money without actually buying stocks, means private or retail CFD traders and brokers do not need much funds to enter the market.
However, trading on margin can also be equally risky. Similar to magnifying your returns, it can also magnify your losses. In fact, the loss can run over the amount you have deposited in your CFD trading account.
A good retail CFD broker will tell you this in advance. Others prefer to limit the amount you can open a position to curb runaway losses.
In line with that, there are advisory and then there are execution-only retail CFD brokers. Execution-only CFD brokerage platforms will let you come up with your own trading ideas, so you have to figure out what to do on your own.
On the other hand, advisory retail CFD brokerages offer advisory services. Some circles believe these types tend to have brokers on commission hence the vested interest in encouraging you to trade more. But is that a problem when you are getting sensible, profitable trades?
Keep in mind, though, that paying a high fee means your CFD investment will not make economic sense if you choose a CFD for the long-haul.
Direct Market Access CFD Brokers
The third category of equity CFD brokers is different from retail CFD brokers in that you get to work your orders straight to the CFD exchange order book compared to transacting from a retail CFD brokers’ widened price.
As a DMA trader, you can get better prices because you are able to make limits inside the offer or bid. On the other hand, it also means you get charged higher fees in trade commissions.
Over to you. From the above classes of CFD brokers, you can decide which one suits your equity CFD exchange needs no matter your CFD trading experience level.